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CLOTHING DEDUCTIONS HUNG OUT TO DRY
What can I claim?Quote of the month

ARE YOU HOLDING BACK YOUR BUSINESS?
“I didn’t get time…” No more excuses set a realistic budget map your cash expect the unexpected take all the tax advantages you can

Will Australians pay more for a good cause?

In the same month that desperate farmers made headlines preparing to destroy starving flocks and pleading with the public to pay a few cents more for their dairy products, Dick Smith’s nationalistic brand announced its closure. The question is, will Australians pay more for a cause?

Comments like “We’re with you” and the 2.8k heart emojis on facebook do very little when you can’t feed your herd. It’s nice there is emotional support and the plight of farmers is recognised but what does it really achieve?

Country Valley Milk reached out on facebook two months ago asking people to sponsor a cow – they estimated that each cow will cost $1,350 to feed until the end of September. Those that have contributed are rewarded with images of their cows – Cow 84’s new calf was shared with their adopted family on facebook (named Splotch MacGonagall by the adopted family).

Farmer Jason Maloney started a GoFundMe page called Food for cows. In a video with the Illawarra Mercury, Mr Maloney breaks down explaining that asking for help is the hardest thing he has had to do – but there has been no significant rain in two years and he doesn’t have enough food or water for the herd. He has already sent part of the herd to market. “I’ve never felt so ashamed and so desperate,” he says. The video is hard to watch.

Interviewed on the Today Show Mr Maloney went on to say that if consumers were willing to pay “20 cents extra for a litre of milk that goes to the farmer, that’s all it takes.”

The farmgate milk price is the price farmers receive from processors for the milk they produce. There is no legislative control over the price milk processing companies pay with pricing deregulated in 2000-01. Milk prices are based on the milk fat and protein solids content of the milk supplied. According to Dairy Australia, the typical factory price paid for farmgate milk per litre is $0.49 in NSW ($6.81 kg of milksolids (kgMS)), $0.38 in Victoria ($5.04 kgMS), $0.60 in Queensland ($8.22 kgMS), $0.37 in South Australia ($5.19 kgMS), $0.51 in Western Australia ($7.06 kgMS $0.39 in Tasmania ($4.97 kgMS). Both Coles and Woolworths sell their home brand milk (2 litre) for $1 per litre. The named milk brands tend to move between $1.50 and $2.93 per litre.

But will buying more expensive branded milk guarantee that farmers get more? Choice says it is hard to say. The two largest processors are Fonterra Australia (owned by a New Zealand dairy cooperative) and Parmalat (an Italian company with French owners). Another large player, Murray Goulburn recently sold to Canadian company Saputo. Lion is owned by Japanese company Kirin. The processors purchase the milk from farmers and produce the varying products. Parmalat for example supplies Pauls, Farmhouse Gold, and Ski. Fonterra produces Mainland Cheese, Bega, Western Star and Perfect Italiano. The price of these brands varies but the price paid by the processor to the farmer is the same. The final price to the farmer depends on domestic and international demand. For example, Fonterra’s opening average milk price is $5.85 per kilogram of milk solids (kgMS) for season 2018-19, with the updated forecast closing average milk price range $5.85 to $6.20kgMS.

Choice says that consumers can support brands that process their own product and buy products from farm controlled co-operatives (co-operatives are owned by the farmers so not only do they get the farm gate price but a dividend). But above all, buy more Australian made dairy product.

Fundamentally however what the farmer is paid is based on demand and supply. Buying cheaper product will drive the price down, if demand is strong for premium products the price paid should go up. But there are no guarantees.

In July, Dick Smith announced that his Dick Smith Foods business will close down. In the 5 page letter to Woolworths, Coles and Metcash, Mr Smith places the blame for his food group’s failings at the feet of Aldi heading the letter “Secretive German Company Now Most Trusted Brand in

Australia.” ‘Secretive’ because Aldi is a family owned German business and not publicly listed.

Smith cites Windsor Farms as an example of the negative impact of a low price model. “Windsor Farms was forced on the road to bankruptcy when Aldi started selling Australian canned beetroot at 75 cents per can. This product had typically sold for $1.30 per can. Very quickly, your companies [Coles, Woolworths, Metcash] matched the price – I can understand you had to do this. Within six months, Windsor Farms and their Cowra Cannery (the only Australian owned cannery remaining) had to close. All the loyal, hard-working staff, many of them Aussie battlers, lost their jobs. The investors lost millions of dollars, and small businesses in the Cowra area were never paid, with substantial amounts owing. I understand the unsecured creditors were over $750,000. The local transport company in Cowra lost $550,000 and their local electrician lost nearly $30,000. The main shareholder lost over $6 million. He was a wonderful Australian who did everything he could to keep the company going.” The collapse of the Cowra cannery occurred in 2013. Windsor Farms was sold to Spice Masters Australia.

The demise of Dick Smith Foods however did not come as a surprise to analysts. The company entered a mature, competitive and crowded market with nationalism as its differentiator – Australian grown, made and owned. The groups Ozemite sells for $2.69 per 100g whereas market leader Vegemite is $2.23 per 100g for a similar small sized jar (Vegemite was bought by Bega in 2017). Not all of the product range are above the market leader’s pricing point but most offer little incentive to switch brands beyond a perception of doing the right thing.

Aldi are trusted as they perceive to be giving ‘ordinary Australians’ a ‘fair go’ at the checkout. They introduced competition to a sector where there was little choice between the major players. Consumers have responded well despite the reduced range, a lack of known brands and service extras, as long as they can pay less and get the Aldi special buys. Any potential impact on the manufacturing food chain of cheap pricing is too far removed.

The bottom line is that consumers will preference a product linked to a cause they identify with but only if there is a benefit in doing so. Cage free eggs are a case in point. While more expensive than caged eggs the demand for cage free eggs has grown. No one wants their egg choice to support perceived cruelty and free range eggs are perceived to be healthier and more natural.

One of the great things about Australia is that when the country has been in turmoil, it is the willingness of Australians, either individually or through their businesses, to do something that has made the difference. The Government is there for support but in a more rigid and structured way. If you think something should change, change it – as a nation we don’t wait for someone else to find the solution. Business can be an exceptional driver of change because of the reach and influence they have. But ultimately it is our capacity to innovate and find new solutions to problems that will succeed. If we are uncompetitive we will find ways to shift focus and deliver what the market wants. Take the example of Just Veg owned by Queensland based Kalfresh. Kalfresh has grown from a farm business to one of “Queensland’s leading vegetable production companies and boasts a state-of-the-art washing and packing facility”. They take ‘wonky carrots’, the ones that can’t be sold to fussy consumers, and turns them into farm to fork cut carrots for lunchboxes – perfectly sliced into bite sized sticks.

Clothing deductions hung out to dry

The Australian Taxation Office is closely examining work-related clothing and laundry expense claims of taxpayers submitting their 2017-18 tax returns.

The ATO says that clothing claims are up nearly 20% over the last five years with people either making mistakes or deliberately over-claiming. Common mistakes include people claiming ineligible clothing, claiming for something without having spent the money, and not being able to explain the basis for how the claim was calculated.

“Around a quarter of all clothing and laundry claims were exactly $150, which is the threshold that requires taxpayers to keep detailed records. We are concerned that some taxpayers think they are entitled to claim $150 as a ‘standard deduction’ or a ‘safe amount’, even if they don’t meet the clothing and laundry requirements,” Assistant Commissioner Kath Anderson said.

While this particular announcement focuses on clothing related expenses, it has been clear for some time now that the ATO is paying very close attention to work related expenses in general. All claims should be supported by evidence – just in case the ATO decides your claim requires closer scrutiny. We have heard of a number of real life examples in the last year or so where the ATO has queried and challenged very small deduction amounts which could not be supported by appropriate evidence.

Unique, distinctive uniforms – clothes that are designed and made for the employer and not publicly available – like shirts with the company logo.

If you claim a $150 on clothing and laundry expenses, just be aware that you might be asked to prove these expenses.

Quote of the month
“If your house is burning, wouldn’t you try and put out the fire?”
Imran Khan, former cricketer and Pakistan’s incoming Prime Minister.

Are you holding back your business?

“I didn’t get time…” No more excuses

Most people simply don’t set aside the time to do the forward planning they know they need to do. Here’s a simple test: write down your goals for the business. Now ask yourself, are you doing something to achieve those goals every day or every week? If not, it’s not a goal. It’s just a nice thought.

Set a realistic budget

Financially mapping your business reduces your risk and removes some of the surprises that can occur. Your budget needs to be realistic – not just a percentage increase on last year.

Start with an operating budget and assess each line critically. Map your revenue to see where, how and when the money is coming in to create a reliable estimate of your income for the coming year. Once you have your revenue expectations in place, look at what is required to generate that income. For example, what advertising, marketing and resources will be required?

Once you are comfortable with your revenue, work up your expenditure budget. Be tough on costs. Don’t forget to allow for growth and the increases that are likely to flow through.

Once your budget is complete and you have a good idea of your likely profit margins, do a couple of alternative estimates for your key revenue drivers so you understand the impact of changes to your assumptions. Once you have all this in place, track and measure it throughout the year. Where possible, your management team should be a part of this process and take responsibility for achieving the budget numbers they give you. When people don’t take the steps that they knew were required to achieve the budget the gaps become obvious fairly quickly. Having a budget in place that you need to report on regularly makes you focus on what really needs to be done.

Map your cash

Even some very large businesses have failed because they ran out of cash. Understanding your cashflow needs is vital particularly for high growth business.
Understanding your cash position is about understanding the timing differences: How long will it take for your customers to pay you? How much stock will you need to hold? And, what are the payment terms required by your suppliers? With your cash flow, don’t forget to allow for things like tax payments, loan repayments, dividends and any capital purchases that are planned. These can be ‘big ticket’ items and if you don’t allow for them then you will get caught out.

Don’t deal with these on a one-off basis as they arise, plan them in advance.

Expect the unexpected

Growing to death is often the result of unplanned growth opportunities. It’s ironic that seizing a major sales contract or big new client can be your business’s ruin but its more common than you think.

Many business operators are very good at what they do. Most have an excellent knowledge of the business they conduct and understand their products and services. Most also have an in-depth knowledge of sales performance and revenue. Few however, have a high level of financial management expertise, so when a big new opportunity presents, critical financial questions are not part of the vocabulary. As a result, there can be a sudden and unintended impact on their financial position. A rush of sales might be a great thing but it is not always counterbalanced by a rush of income and profit. Free cash and liquidity are the victims.

Take all the tax advantages you can

For small business in particular there are a range of concessions and funding you can access. Many businesses simply don’t realise the opportunities available to them.

A simple example is trading stock valuations. Your trading stock is an asset that is recorded on your balance sheet. In most cases it should be tax neutral to you. The cost of purchasing stock is expensed in your profit and loss account and offset by the value of the stock asset, until you sell it. While the amount of stock you are carrying will impact on your cash position, because you have your funds tied up in it, there is no direct impact on your profits or taxable income until you sell that stock. However, if at 30 June some of your stock is worth less than its cost price, you have the option to value it at the lower figure and take the tax write off, rather than wait until the stock is sold. This reduction in your stock value will produce a tax saving for you.

For tax purposes, there are a number of ways of valuing stock. Once you have done your stocktake (assuming you need to do one), you can choose what method to apply depending on the stock and your circumstances. The different ways of valuing stock can produce different results. Most businesses chose to value trading stock at cost – but you have the option of valuing your stock at cost, market selling price or replacement value.

For example, if you have stock that is about to become obsolete, valuing it at cost price for tax purposes is not going to help you. In this situation you might be better off to value the stock at market selling price, particularly if it is a large quantity. The tax rules also allow you to use a value that is lower than cost, market selling price or replacement value if this is warranted because of obsolescence or other special circumstances as long as the value you elect is reasonable. Take the example of vitamins with a use by date that only has a month or two left on it. Leading up to and once the vitamins reach their use by date they are unsaleable. In this case, you would estimate how much of the stock you are likely to sell prior to the use by date and at what price. Using previous sales as a guide, if you only expect to sell 15% of the stock prior to the use by date, you would use the market value of this 15%. Other than when you sell your stock, your tax return gives you a once a year opportunity to adjust your stock values and realise any losses.

Another way businesses disadvantage themselves is not taking the Government concessions available to them. The R&D tax incentive and Export Market Development Grant are a classic case. In the case of R&D incentives, if you develop new technologies or products, you might be eligible for a 43.5% tax offset (if your business has a turnover under $20 million). The Export Market Development Grant reimburses up to 50% of eligible export promotion expenses above $5,000 provided that the total expenses are at least $15,000.

Inside
COMPANY TAX CHANGE IN LIMBO
WHEN CAN YOU TAKE YOUR SUPER?
Compassionate grounds
First home buyers
When you die
Divorce and super
What happens if you contributed too much?
Using SMSF assets and funds
New minimum pay rates from 1 July 2018
$10K LIMIT ON CASH PAYMENTS TO BUSINESS
How will the new rules work?
$20K ACCELERATED DEDUCTIONS FOR SMALL BUSINESS EXTENDED ANOTHER YEAR
1 July 2018 Personal income tax cuts

Company tax change in limbo

An issue that many business owners and investors will need to grapple with is uncertainty on the tax rate that applies to companies for the year ended 30 June 2018 and the maximum franking rate on dividends paid during the 2018 income year.

While the Government introduced a Bill to Parliament back in October 2017 which seeks to change the rules in this area, the Bill is still not yet law. As a result, it looks like we will need to apply the existing provisions for determining company tax rates and maximum franking rates (which are based on whether the company carries on a business), but also to be aware that the position might change if and when the Bill passes through Parliament.

Under current rules, a company would be subject to a 27.5% tax rate if it carries on a business (which could include investment activities as long as

Company tax change in limbo

there is a genuine expectation of making a profit) and the aggregated turnover of the company and certain related parties is less than $25m.

If the Bill passes in its current form then the tax rate and maximum franking rate position will depend on whether more than 80% of the company’s income is passive in nature (e.g., interest, rent etc.). If more than 80% of the company’s income is passive in nature, then a 30% tax rate should apply. The $25m aggregated turnover test will also need to be applied.

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New minimum pay rates from 1 July 2018

New award wages and allowances come into effect from 1 July 2018. If you’re an employer, it’s important that you are aware of the new rates and apply them. The Fair Work Ombudsman’s online Pay Calculator can help you determine the right rates to apply.

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When can you take your super?

The cash sitting in your superannuation fund can be tempting, particularly if you are short of cash. But, the reality is there are very few ways you can take advantage of your superannuation once it has been contributed to the fund – even if you change your mind.

The sole purpose test underpins access to your superannuation – that is, superannuation is for the sole purpose of providing retirement benefits to fund members, or to their dependants if a member dies before retirement. It’s important to keep this in mind because it’s often forgotten when people are tempted by ‘too good to be true’ schemes to access their super early.

The ATO recently warned against a scheme spreading through suburban Australia where scammers encourage people to access their superannuation early to pay debts, take a holiday, or provide money to family overseas in need. All the scammers need is a fee for their services and you to sign blank forms and provide identity documentation. Typically, the forms are used to roll-over your super from an industry fund, establish an SMSF, and open a bank account for the new SMSF. Once the superannuation is rolled into the SMSF, the funds are accessible to withdraw. Problem is, accessing the superannuation is illegal unless you meet the conditions. Any super that is withdrawn early is taxed at your marginal tax rate even if the money is returned to your fund later, plus you are disqualified from being a trustee of your SMSF. If you knowingly allow super benefits to be accessed illegally from your fund, penalties of up to $1.1 million and a jail term of 5 years can apply.

Generally, you can only access your super once you turn 65, when you reach preservation age and retire, or reach preservation age and choose to keep working and start a transition to retirement pension. Currently, the preservation age is 55 years old for those born before 1 July 1960. It then increases by one year, every year, up to the maximum of 60 for those born after 30 June 1964. There are some very limited circumstances where you can legally access your super early.

Treasury is in the midst of a review into the early release of superannuation. The review was sparked by a rapid increase in requests for early access to fund medical treatments such as gastric banding surgery.

The review however is focussed on more than medical treatments, looking at the issue broadly including whether it is appropriate to provide early access to superannuation to pay compensation to victims of crime.

Compassionate grounds

Superannuation benefits can be released on compassionate grounds to meet expenses related to medical treatment, medical transport, modifications necessary for the family home or motor vehicles due to severe disability, and palliative care. Funds may also be released on compassionate grounds to prevent foreclosure of a mortgage or exercise of a power of sale over the fund member’s home (principal place of residence); or to pay for expenses with a dependant’s death, funeral or burial.

Early access to super needs to be a last resort. It’s up to the person applying for early access to prove to the regulator that they don’t have the financial capacity to meet these expenses without access their superannuation.

In 2016-17, the Department of Human Services received 37,105 applications for early access to superannuation on compassionate grounds, with 21,258 approved. The average amount released was $13,644. The great majority (72%) of funds released were on medical grounds, 18% were released for mortgage payments.

A person seeking early release for medical treatment must provide written evidence from at least two medical practitioners – one of whom must be a specialist – certifying that the treatment or medical transport:

is necessary to treat a life-threatening illness or injury; or alleviate acute or chronic pain; or alleviate an acute or chronic mental disturbance; and

is not readily available to the individual or their dependant through the public health system.

At present, the Department of Human Services will respond to applicants within 28 days. The applicant then must approach their superannuation fund trustee who has ultimate discretion regarding the release of the funds. From 1 July 2018 however, the Australian Taxation Office will take over administration of early release applications, streamlining the process so applicants and superannuation funds receive the compassionate release notice electronically and simultaneously.

First home buyers

The First Home Super Saver Scheme (FHSS) enables first-home buyers to save for a deposit inside their superannuation account, attracting the tax incentives and some of the earnings benefits of superannuation.

Home savers can make voluntary concessional contributions (for example by salary sacrificing) or non-concessional contributions (voluntary after-tax contributions) of $15,000 a year within existing caps, up to a total of $30,000. Mandated employer contributions cannot be withdrawn under this scheme, it is only voluntary contributions made from 1 July 2017 that can be withdrawn.

When you die

Superannuation is not an asset of your estate so your superannuation is provided to your eligible beneficiaries – your spouse (de facto) children or a financial dependant – by the fund trustee.

Putting in place a binding death nomination however will direct your superannuation to whoever you nominate, as long as they are an eligible beneficiary. If you have nominations in place, it is essential that you keep these current. Death benefits are normally paid as a lump sum but in some circumstances can be paid as an income stream.

Just be aware that with the $1.6 million transfer balance cap in place, if your superannuation is paid as a death benefit pension to your nominated beneficiary, this could tip them over the cap. It’s a good idea to get estate planning advice to manage it correctly.

Company tax change in limbo

there is a genuine expectation of making a profit) and the aggregated turnover of the company and certain related parties is less than $25m.

If the Bill passes in its current form then the tax rate and maximum franking rate position will depend on whether more than 80% of the company’s income is passive in nature (e.g., interest, rent etc.). If more than 80% of the company’s income is passive in nature, then a 30% tax rate should apply. The $25m aggregated turnover test will also need to be applied.

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New minimum pay rates from 1 July 2018

New award wages and allowances come into effect from 1 July 2018. If you’re an employer, it’s important that you are aware of the new rates and apply them. The Fair Work Ombudsman’s online Pay Calculator can help you determine the right rates to apply.

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Divorce and super

The Family Law Legislation Amendment (Superannuation) Act 2001 allows superannuation to be split during a divorce either by agreement or by court order.

Before making a superannuation agreement, the parties must receive separate and independent legal advice. The agreement must be in writing and must be endorsed by a qualified legal practitioner.

Where the superannuation is split by order of the family court, the court decides on how the fund is split.

Essentially, the amount of split super is rolled into the other parties superannuation fund. The same rules apply to accessing superannuation. That is, it cannot be accessed until you turn 65 or reach perseveration age.

If you and your spouse have an SMSF, you need to continue to manage the fund. Relationship breakdown does not suspend your obligations as trustee.

What happens if you contributed too much?

If you contributed too much superannuation to your fund, you cannot simply withdraw the amount.

If you breached your contribution caps, you can apply to withdraw the amount above your cap from your fund. The excess amount is treated as personal assessable income and taxed at your marginal tax rate plus an excess concessional contributions charge. Withdrawal of the excess amounts should not occur until the ATO provides you with a release authority that then needs to be given to the superannuation fund.

If you did not breach your contribution limit but simply overcommitted to superannuation, you cannot simply withdraw the amount.

Using SMSF assets and funds

In general, the assets of an SMSF cannot be used for the personal use or enjoyment of the fund members (or their associates such as friends or family). For example, If the SMSF owns a holiday home, you cannot use it, if the fund has vintage cars, you cannot drive them, if your fund owns art, you cannot hang the art in your home or your office.

The exception to this is business real property. For example, assuming the trust deed allows for it, business owners can use their SMSF to purchase a building, then lease that building back to their business. Business real property is land and buildings used wholly and exclusively in a business.

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$10k limit on cash payments to business

One of the interesting approaches to tackling the black economy in the recent 2018-19 Federal Budget was the announcement of a $10,000 limit on cash payments to business.

Unrecorded and untaxed transactions that occur in the community are estimated at up to 3% of GDP or around $50 billion. We have all seen examples of the black economy in action in the form of cash payments and money not ringing through a retailer’s till. This initiative targets high value transactions that are generally used to avoid tax obligations or for laundering the proceeds of a crime.

How will the new rules work?

The cash payment limit targets larger cash payments – typically made for cars, yachts and other luxury goods, agricultural crops, houses, building renovations and commodities – removing the ability of any individual or business to make a single cash transaction of $10,000 or more.

The limit would apply to all payments made to businesses with an ABN for goods or services. The impending restrictions would not apply to private sales where the seller does not have an ABN, or cash payments to financial institutions.

Transactions at or in excess of the $10,000 threshold would need to be made electronically or by cheque. Splitting the payment into smaller amounts either as cash payments or a combination of cash and electronic payments would not be allowed. There would also be restrictions to prevent payment structuring to get around the payment limit.

At present, only financial services, banks and gambling industries have obligations for cash transactions of $10,000 or more. Under the Anti-Money Laundering and Counter-Terrorism Financing rules, transactions of $10,000 or more must be reported to the Australian Transaction Reports and Analysis Centre (AUSTRAC) within 10 working days.

Australia will not be the first country to introduce cash payment limits; France, Spain and Italy all impose limits at varying levels and generally for much smaller amounts than $10,000. For example, France imposes a EUR 1,000 limit for goods and EUR 450 for certain services. There are some exemptions for non-residents, salaries paid in cash, and for those who do not have access to any other form of payment.

The Australian limit on cash transactions is intended to apply from 1 July 2019. The legislation enabling the measure is currently in consultation phase and is not yet law. We will keep you up to date on progress.

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$20k accelerated deductions for small business extended another year

The ability for small business entities to claim an immediate deduction for assets costing less than $20,000 has been extended for another 12 months until 30 June 2019.

From 1 July 2019, the immediate deduction threshold will reduce back to $1,000.

There are no limits to the number of times you can use the immediate deduction assuming your cashflow supports the purchases.

If your business is registered for GST, the cost of the asset needs to be less than $20,000 after the GST credits that can be claimed by the business have been subtracted from the purchase price. If your business is not registered for GST, it is the GST inclusive amount.

Second hand goods are also deductible. However, there are a number of assets that don’t qualify for the instant asset write-off as they have their own set of rules. These include horticultural plants, capital works (building construction costs etc.), assets leased to another party on a depreciating asset lease, etc.

If you purchase assets costing $20,000 or more, the immediate deduction does not apply but small businesses have the ability to allocate the purchase to a pool and depreciate the pool at a rate of 15% in the first year and 30% for each year thereafter.

1 July 2018 Personal income tax cuts

New personal income tax rates come into effect from 1 July 2018. The top threshold of the 32.5% personal income tax bracket will increase from $87,000 to $90,000. Dovetailing into the tax bracket change is the introduction of the Low and Middle Income Tax Offset for those with taxable incomes up to $125,333. The offset is a non-refundable tax offset that you receive when you lodge your income tax return.

If your annual taxable income is $80,000 in 2018-19, then the personal income tax changes provide an annual tax reduction of $530 per year. If your annual taxable income is $120,000, then the changes give you an annual reduction of $215.

Reward for work is a dominant theme in this year’s Budget. The seven year personal income tax plan initially targets low to middle income earners before making significant changes to the tax brackets.

Innovation continues to be the Government’s mantra with the medical industry a clear winner. The Government has dedicated a total of $1.3 billion to fund genomic research projects investigating medicines that can be tailored to individual patients, clinical trials of new drugs and development of new medical technologies.

As you would expect from an election budget, there is not a lot of bad news or serious cuts. The black economy however features consistently with a multiagency taskforce and all manner of programs including the imposition of a limit of $10,000 on cash payments.

There are also a number of tax changes to close loopholes and while not presented in the budget, the Treasurer has flagged the release of a discussion paper that will explore options for taxing digital business in Australia. There will be more to come – just not this year.

Key initiatives

$20k accelerated depreciation extended until 30 June 2019

Research & development incentive shake-up

Black economy – new initiatives and more industries rolled into the taxable payments system

Introduction of a 3-year cycle for SMSF audits for compliant funds

Seven year personal tax cut plan

Major innovation funding

For Business

$20k Accelerated Depreciation Extended

Date of effect

current until 30 June 2019

The ability for small business entities to claim an immediate deduction for assets costing less than $20,000 has been extended until 30 June 2019.

From 1 July 2019, the immediate deduction threshold will reduce back to $1,000.

There are no limits to the number of times you can use the immediate deduction assuming your cashflow supports the purchases.

If your business is registered for GST, the cost of the asset needs to be less than $20,000 after the GST credits that can be claimed by the business have been subtracted from the purchase price. If your business is not registered for GST, it is the GST inclusive amount.

Second hand goods are also deductible. However, there are a number of assets that don’t qualify for the instant asset write-off as they have their own set of rules. These include horticultural plants, capital works (building construction costs etc.), assets leased to another party on a depreciating asset lease, etc.

If you purchase assets costing $20,000 or more, the immediate deduction does not apply but small businesses have the ability to allocate the purchase to a pool and depreciate the pool at a rate of 15% in the first year and 30% for each year thereafter.

Research & Development Incentive Shake-Up

Date of effect

1 July 2018

Applying to income years starting on or after 1 July 2018, the way the research and development (R&D) tax incentive applies will change to focus on ‘more intensive’ R&D activities, particularly in medical and clinical development. The changes attempt to refocus the incentive on activities that go well beyond what companies would normally do to improve.

Companies under $20m

For companies with an aggregated annual turnover less than $20 million:

An annual $4 million cap will be introduced on cash refunds for R&D claimants. Amounts that are in excess of the cap will become a non-refundable tax offset and can be carried forward into future income years;

Clinical trials will be excluded from the $4 million cap on cash refunds, to encourage development in this area; and

The refundable R&D tax offset will be amended and will become a premium of 13.5 percentage points above the company’s tax rate for that year.

Companies over $20m

For companies with aggregated annual turnover of $20 million or more, an R&D premium will be introduced that ties the rates of the non-refundable R&D tax offset to the incremental intensity of R&D expenditure as a proportion of total expenditure for the year.

The R&D expenditure threshold – the maximum amount of R&D expenditure eligible for concessional R&D tax offsets – will be increased from $100 million to $150 million per annum.

The ATO has expressed concerns in recent years that many claims are being made under the R&D tax incentive for expenditure that does not meet the strict conditions for the tax offset. For example, the ATO’s view is that some companies have been claiming the R&D tax offset in connection with normal business activities rather than experiments being undertaken for the purpose of generating new knowledge. In addition to the changes outlined above, additional resources will be provided to the ATO and Department of Industry, Innovation and Science to undertake greater enforcement activity and provide more guidance for those seeking to make claims.

The taxable payments reporting system requires businesses in certain industries to report payments they make to contractors (individual and total for the year) to the ATO. ‘Payment’ means any form of consideration including non-cash benefits and constructive payments.

From 1 July 2019 the following industries will be required to lodge annual reports to the ATO:

security providers and investigation services;

road freight transport; and

computer system design and related services.

The building industry, cleaning and courier businesses are already required to provide this enhanced reporting to the ATO.

The first annual report for these industries is required by August 2020. Businesses in these industries will need to start collecting information on payments to contractors from 1 July 2019.

No More Salary & Wage Tax Deductions For Late Paying Employers

Date of effect

1 July 2019

The Government really wants employers focussed on their tax obligations to the point where employers that fall behind will lose the right to claim employment related tax deductions.

Employers who do not keep up with their PAYG obligations will not be able to claim a tax deduction for payments to employees (such as wages).

Businesses will also lose the ability to claim deductions for payments made to contractors where the contractor does not provide an ABN and the business does not withhold PAYG.

More Entities To Be Caught By Significant Global Entity Rules

Date of effect

1 July 2018

Significant global entities (SGE) face an increased level of compliance. From 1 July 2018, the definition of an SGE will be expanded.

In very broad terms, at present, an entity is an SGE if:

It is the parent entity of a group with annual global income of $1bn or more; or

It is a member of a group that includes a parent entity with annual global income of $1bn or more and the group is consolidated for accounting purposes as a single group.

These rules could potentially apply to Australian subsidiary companies or Australian branches of foreign companies, regardless of the turnover of the Australian operations.

The definition of an SGE will be expanded from 1 July 2018 to include:

members of large multinational groups headed by private companies, trusts and partnerships; and

members of groups headed by investment entities.

If an entity is treated as an SGE then it could be exposed to:

Increased penalties, including for situations where returns etc., are not lodged on time;

Country-by-country reporting obligations; and

The need to provide general purpose financial statements to the ATO if these have not already been provided to ASIC.

$10k Limit On Cash Transactions

Date of effect

1 July 2019

A limit of $10,000 will be introduced for cash payments made to businesses for goods and services from 1 July 2019. Payments above the threshold will need to be made through an electronic payment system or by cheque.

The measure does not impact on transactions with financial institutions or non-business consumer to consumer transactions. But, if you run a business, from 1 July 2019 you will not be able to accept cash transactions above $10,000.

Thin Capitalisation Rules Tightened

Date of effect

1 July 2019

The thin capitalisation rules are designed to place a limit on the level of interest and other debt deductions that can be claimed in Australia when Australian operations are heavily funded by debt rather than by equity. The thin capitalisation rules apply where total debt deductions (e.g., interest expenses) for the taxpayer and its associates exceeds $2 million.

These rules will be tightened by requiring entities to align the value of their assets for thin capitalisation purposes with the value included in their financial statements.

This measure will apply to income years commencing on or after 1 July 2019 and all entities must rely on the asset values contained in their financial statements for thin capitalisation purposes. Valuations made prior to 7.30PM (AEST) on 8 May 2018 may be relied on until the beginning of an entity’s first income year commencing on or after 1 July 2019.

The Government will also ensure that foreign controlled Australian consolidated entities and multiple entry consolidated groups that control a foreign entity are treated as both outward and inward investment vehicles for thin capitalisation purposes. This will apply for income years commencing on or after 1 July 2019. This change will ensure that inbound investors cannot access tests that were only intended for outward investors.

Partnerships And The Small Business CGT Concessions

Date of effect

From 7:30PM (AEST) on 8 May 2018

This measure seeks to close a loophole that provides access to the small business CGT concessions by partners in large partnerships.

Partners that alienate their income by creating, assigning or otherwise dealing in rights to the future income of a partnership (often referred to as Everett assignments) will no longer be able to access the small business capital gains tax (CGT) concessions in relation to these rights.

The small business CGT concessions assist owners of small businesses by providing relief from CGT on the disposal of assets related to their business. However, some taxpayers, including large partnerships, are able to access these concessions in relation to their assignment of a right to the future income of a partnership to an entity, without giving that entity any role in the partnership. Partly this is due to the fact that there is no minimum percentage interest that needs to be held by partners in a partnership to access these concessions, unlike the 20% threshold that normally applies to shareholders of a company or beneficiaries of a trust.

This has been an area of concern for the ATO for some time and in recent years the ATO has indicated that the general anti-avoidance rules can potentially apply to some of these arrangements. It appears that the Government has decided to simply take away some of the concessions in the tax system which make these arrangements attractive.

Division 7A And Unpaid Present Entitlements

Date of effect

1 July 2019

Unpaid present entitlements will come directly within the scope of Division 7A.

An unpaid present entitlement arises where a trust appoints income to a corporate beneficiary but this amount has not actually been paid to the company. The measure seeks to ensure that the unpaid present entitlement is either required to be repaid to the private company over time as a complying loan or will be subject to tax as a dividend.

While Division 7A can currently apply to some arrangements involving unpaid present entitlements owed to companies, they are treated differently to loans and in some cases receive preferential treatment compared with loans. While the Government has not released much detail on this proposed change, presumably the changes will ensure that the treatment of unpaid present entitlements is more closely aligned with the current treatment of loans. However, we will have to wait and see whether the changes only apply to newly created entitlements or whether existing unpaid entitlements will be affected.

The Division 7A reforms announced in the previous budget have been delayed to include this latest measure as a consolidated package.

Regulators Target Phoenixing

Date of effect

No date specified

Corporation and tax laws will be reformed in an attempt to target phoenix activity. The reforms:

Introduce new phoenix offences to target those who conduct or facilitate illegal phoenixing;

Limit the ability of directors to resign when this would leave the company with no directors; and

Restrict the ability of related creditors to vote on the appointment, removal or replacement of an external administrator.

The current Director Penalty Regime includes unpaid superannuation guarantee and PAYG withholding amounts but does not include GST liabilities. These proposed changes will ensure that directors become personally liable in situations where the company has not satisfied its GST obligations as well as luxury car tax and wine equalisation tax liabilities.

GST ‘Hit’ For Online Hotel Room Resellers

Date of effect

1 July 2019

The GST will be extended to offshore sellers of hotel accommodation in Australia to ensure they calculate the GST in the same way as local providers.

Currently, offshore sellers of Australian hotel accommodation are exempt from including sales of hotel accommodation in their GST turnover. This means they are often not required to register for and charge GST on their mark-up over the wholesale price of the accommodation. This was deliberate to encourage foreigners to book accommodation in Australia. The market has shifted since with domestic and foreign consumers booking through online sites.

The measure will apply to sales made on or after 1 July 2019. Sales that occur before 1 July 2019 will not be subject to the measure even if the stay at the hotel occurs after this date.

This change requires agreement by the States and Territories.

Luxury Car Tax Removed For Re-Imported Refurbished Cars

Date of effect

1 July 2019

The luxury car tax will be removed from 1 January 2019 for situations where cars are re-imported into Australia following a refurbishment overseas.

Currently, cars that are refurbished in Australia are not subject to luxury car tax. However, cars exported from Australia to be refurbished overseas and then re-imported are subject to the tax where the value of the car exceeds the relevant luxury car tax threshold.

HELP Cost Recovery From Education Providers

Date of effect

1 January 2019

New fee for service style arrangements will come into place for education providers to recover the costs of administering Higher Education Loan Program (HELP) including:

An annual charge for HECS HELP and FEE HELP approved higher education course providers to partially recover the costs associated with administering the programs; and

Previously Announced Measures

Tax carve out for craft brewers

The alcohol excise refund scheme cap will be increased to $100,000 per financial year and the concessional draught beer excise rates will be extended to 8 litre or greater kegs from 1 July 2019.

Currently, the alcohol excise refund scheme provides alcohol producers a refund of 60% of excise paid up to a cap of $30,000 per financial year. Draught beer sold at licensed venues such as pubs in individual containers exceeding 48 litres is taxed at lower rates compared with beer sold in individual containers up to and including 48 litres. However, the lower rates mainly benefit large breweries, which typically use 50 litre kegs. The measures help to level the playing field for smaller craft beer producers.

Tobacco duty and excise reform

Date of effect

1 July 2019

From 1 July 2019, tobacco importers will be required to pay all duty and tax liabilities upon importation -this is different to the current system where tobacco can be imported and stored in licensed warehouses prior to tax being paid.

Transitional arrangements apply to tobacco products held in licensed warehouses on 1 July 2019. These measures will allow eligible entities to pay the liability on the warehoused stock within 12 months. Current weekly settlement arrangements will no longer apply to imported tobacco. Although there is currently no licensed commercial tobacco production in Australia, the taxing point for any future domestic manufacture of tobacco will also be changed to be consistent with the new taxing point for tobacco imports.

From 1 July 2019, permits will be required for all tobacco imports above the duty-free limits for travellers.

Dovetailing into the excise measures is the creation of a new multi-agency Illicit Tobacco Task Force from 1 July 2018. Additional resources have also been provided to the ATO to modernise its excise system and pursue compliance.

Stapled structures package

Date of effect

1 July 2018 – thin capitalisation changes

1 July 2019 – other measures

A package of measures has been introduced to address risks to the corporate tax base posed by stapled structures and similar arrangements. The package will also limit access to concessions for passive income utilised by foreign governments and foreign pension funds.

Stapled structures arise where two or more entities are commonly owned and bound together such that the interests in them cannot be bought or sold separately. At least one of the two entities is a trust.

The Government’s concerns have been driven by findings that over recent years, a growing number of taxpayers have sought to re-characterise trading income into more favourably taxed passive income through the misuse of the managed investment trust (MIT) regime. When combined with existing concessions used by foreign pension funds and sovereign wealth funds, some foreign investors have been able to access tax rates of 15% or less (in some cases, almost tax-free), rather than the applicable corporate tax rate of 30% on Australian business income.

The key elements of the package are:

Applying a final withholding tax set at the corporate tax rate to distributions derived from trading income that has been converted to passive income using a MIT (with a 15 year exemption for new, Government-approved nationally significant infrastructure assets);

Amending the thin capitalisation rules to prevent foreign investors from using multiple layers of flow-through entities (i.e. trusts and partnerships) to convert their trading income into favourably taxed interest income;

Superannuation

Many of the reforms in superannuation impact on administration of funds, particularly large APRA funds.

3-Year Cycle for SMSF Audits

Date of effect

1 July 2019

SMSFs with a history of good record‑keeping and compliance – that is, three consecutive years of clear audit reports and annual returns lodged on time, will only be required to have their fund audited every three years.

The Government has flagged consultation with key stakeholders on this measure (with no further details available at present).

The key issue with this measure is how the three-year cycle will work – is it an audit for one year in three or three years once?

If the audit is only for the third year of the cycle, then there is a major risk of compliance issues going unnoticed. Having two years with no audits may present opportunities for ‘creative’ trustees to manipulate the superannuation system. It will be difficult for an auditor to sign-off on the third year without having a level of comfort as to what has transpired in previous years.

If the audit is for the prior three years, the benefit for members may be negligible as auditors will need to charge for three years of work. The measure is designed to reduce ‘red-tape’ for trustees but having three years of questions from auditors might just group three years into one.

Retirement Income Strategy for Super Fund Members

Date of effect

No time period noted

The Superannuation Industry (Supervision) Act 1993 will be amended to introduce a retirement covenant that will require superannuation trustees to formulate a retirement income strategy for superannuation fund members.

The Corporations Act 2001 will also be amended to require providers of retirement income products to report simplified, standardised metrics in product disclosure to assist customer decision making.

Preventing Inadvertent Breaches of Concessional Caps

Date of effect

1 July 2018

Individuals whose income exceeds $263,157 and have multiple employers will be able to nominate that their wages from certain employers are not subject to the superannuation guarantee (SG).

It is anticipated that employees who use this measure will negotiate additional income in lieu of the 9.5% superannuation guarantee.

Exit Fees Scrapped, Fees Capped, And More Transferred To ATO

Date of effect

1 July 2019

A ban on exit fees from all superannuation funds will be introduced along with a 3% annual cap on passive fees on accounts with balances below $6,000 from 1 July 2019.

Superannuation funds will also be required to transfer all inactive superannuation accounts with balances below $6,000 to the ATO.

These changes create a gain of $1.1 billion in the underlying cash balance over the forward estimates. This gain is in part a timing issue reflecting the time taken to reunite lost super balances with their owners.

Opt-In Insurance Inside Super

Date of effect

1 July 2019

Insurance within superannuation will move from a default framework to an opt-in basis for:

members with low balances of less than $6,000;

members under the age of 25 years; and

members whose accounts have not received a contribution in 13 months and are inactive.

This means that these members will not automatically be provided with insurance inside their superannuation fund but instead will opt-in if they choose. The Government is concerned that automatic insurance cover is eroding savings with many unaware they have insurance within their fund or within multiple funds.

The changes will not prevent anyone who wants insurance from being able to obtain it — low balance, young, and inactive members will still be able to opt-in to insurance cover within super.

Affected members will have 14 months to decide whether they will opt in to their existing cover or allow it to switch off.

Work Test Exemption For Retirees

Date of effect

1 July 2019

An exemption to the work test will be introduced for people aged 65 to 74 with superannuation balances below $300,000, who make voluntary contributions to superannuation. The exemption applies in the first year that they do not meet the work test requirements. This measure is really a reprieve for people transitioning to retirement to get their affairs in order.

Currently, the work test restricts the ability to make voluntary superannuation contributions for those aged 65‑74 to individuals who work a minimum of 40 hours in any 30 day period in the financial year.

Example from the Superannuation Work Test exemption for retirees fact sheet

At the age of 68, Gus retires from full-time work on 1 June 2020. As he would not meet the work test in the 2020-21 financial year, Gus would currently be prevented from making any voluntary super contributions after 30 June 2020.

As his total superannuation balance is $150,000 at the end of the 2019-20 financial year, Gus is eligible to make contributions under the work test exemption from 1 July 2020 to 30 June 2021.

As Gus had not reached his concessional contribution cap over the past 2 years, having contributed only $18,000 in 2018-19 and $12,000 in 2019-20, under the existing carry forward arrangements and new work test exemption Gus can contribute up to $45,000 at concessional tax rates in the 2020-21 financial year.

As a result of the work test exemption, Gus is also able to contribute up to $100,000 in non-concessional contributions in 2020-21.

Previously Announced Measures

Increasing the maximum number of members in an SMSF

Date of effect

1 July 2019

The maximum number of allowable members in new and existing SMSFs and small APRA funds will increase from four to six.

Investors

No Deductions For Vacant Land

Date of effect

1 July 2019

Deductions will be denied for expenses associated with holding vacant land. The Government is concerned that deductions are being improperly claimed for expenses, such as interest costs, related to holding vacant land, where the land is not genuinely held for the purpose of earning assessable income. They expect the measure will also help to prevent ‘land banking’, which denies the use of land for housing or other development.

Denied deductions will not be able to be carried forward for use in later income years. However, expenses which cannot be claimed as a deduction can form part of the CGT cost base of the property as long as they fall within specific categories (such as interest, borrowing expenses and council rates). This means that the expenses can reduce a capital gain made on future sale, although there are limitations on this which mean that holding costs cannot create or increase a capital loss and cannot generally be taken into account if the property was acquired before 20 August 1991.

The measure will not apply to expenses associated with holding land that are incurred after:

a property has been constructed on the land, it has received approval to be occupied and is available for rent; or

the land is being used by the owner to carry on a business, including a business of primary production.

The measure applies to land held for residential or commercial purposes. However, the ‘carrying on a business’ test will generally exclude land held for commercial development.

Unfortunately, it appears that this measure may impact on those who incur holding costs in relation to land that is genuinely held for the purpose of producing assessable income, including where the owner is actively constructing a dwelling on the land that will be used as a rental property (Steele’s case and ATO ruling TR 2004/4 deal with this area). This is another example of where those doing the right thing will be impacted by the Government becoming fed up with those who aren’t.

It also remains to be seen how holding expenses that relate to land held as trading stock will be dealt with under the proposed changes.

Individuals & Families

Personal Income Tax Cuts

The anticipated personal income tax cuts will be delivered as part of a seven year plan culminating in the removal of one tax bracket from 1 July 2024. The Government states that the end result will be that around 94% of taxpayers will be subject to a marginal tax rate of 32.5%.

The focus right now however is the low and middle tax income brackets with changes to the tax brackets and the introduction of the Low and Middle Income Tax Offset.

Tax thresholds

Tax rate

Current

From 1 July 2018

From 1 July 2022

From 1 July 2024

0%

$0 – $18,200

$0 – $18,200

$0 – $18,200

$0 – $18,200

19%

$18,201 – $37,000

$18,201 – $37,000

$18,201 – $41,000

$18,201 – $41,000

32.5%

$37,001 – $87,000

$37,001 – $90,000

$41,001 – $120,000

$41,001 – $200,000

37%

$87,001 – $180,000

$90,001 – $180,000

$120,001 – $180,000

–

45%

>$180,000

>$180,000

>$180,000

>$200,000

Low and middle income tax offset

Up to $530

–

–

LITO

Up to $445

Up to $445

Up to $645

Up to $645

From 1 July 2018:

The top threshold of the 32.5% personal income tax bracket will increase from $87,000 to $90,000.

From 1 July 2022:

The top threshold of the 19% personal income tax bracket will increase from $37,000 to $41,000.

The top threshold of the 32.5% personal income tax bracket will again increase from $90,000 to $120,000.

The Low Income Tax offset will increase from $445 to $645. The increased Low Income Tax Offset will be withdrawn at a rate of 6.5 cents per dollar between incomes of $37,000 and $41,000, and at a rate of 1.5 cents per dollar between incomes of $41,000 and $66,667.

From 1 July 2024:

The 37% tax bracket will be removed.

The top threshold of the 32.5% personal income tax bracket will again increase from $120,000 to $200,000.

Low and Middle Income Tax Offset

Date of effect

From 2018-19 until 2021-22 income years

How to give low and middle income earners a tax break without directly benefiting those on larger incomes? The Government’s solution to this conundrum is the introduction of the Low and Middle Income Tax Offset (LIMITO) from the 2018-19 income year.

Applied as a non-refundable tax offset after an individual lodges their income tax return, the tax offset provides:

Table income

Low and Middle Income Tax Offset (LIMITO)

$0 – $37,000

Up to $200

$37,000 – $48,000

Offset increase of 3 cents per dollar up to $530

$48,000 – $90,000

Up to $530

$90,001 to $125,333

Offset phases out at a rate of 1.5 cents per dollar

Assuming the amending legislation passes Parliament, the offset is intended to be available for the 2018-19 to 2021-22 income years.

The Low and Middle Income Tax Offset is in addition to the existing Low Income Tax Offset.

If you are trying to work out what these changes mean to you, the Government has added a tax relief estimator on the front page of the budget website. For example, someone on an annual taxable income of $65,000, would receive an annual benefit of around $530 in the first few years and a total benefit of $3,740.

Changes To Testamentary Trusts

Date of effect

1 July 2019

The concessional tax rates available for minors receiving income from testamentary trusts will be limited to income derived from assets that are transferred from the deceased estate or the proceeds of the disposal or investment of those assets.

Currently, income received by minors from testamentary trusts is taxed at normal adult rates rather than the higher tax rates that generally apply to minors. The Government is concerned that some taxpayers are inappropriately obtaining the benefit of this lower tax rate by injecting assets unrelated to the deceased estate into the testamentary trust.

While the rules already contain some integrity provisions that are aimed at limiting the scope for inappropriately boosting the income earning capacity of testamentary trusts, the measure clarifies that minors will be taxed at adult marginal tax rates only in respect of the income a testamentary trust generates from assets of the deceased estate (or the proceeds of the disposal or investment of these assets).

Crackdown On Family Trust ‘Round Robin’ Arrangements

Date of effect

1 July 2019

Family trusts will be subject to a specific anti-avoidance rule that applies to other closely held trusts that engage in circular trust distributions.

Currently, where family trusts act as beneficiaries of each other in a ‘round robin’ arrangement, a distribution can be ultimately returned to the original trustee – in a way that avoids any tax being paid on that amount.

The measure would enable the ATO to impose tax on these distributions at a rate equal to the top personal tax rate plus the Medicare levy.

Taxing The Fame Or Image Of High Profile Sportspeople And Actors

Date of effect

1 July 2019

From 1 July 2019, high profile individuals will no longer able to take advantage of lower tax rates by licencing their fame or image to another entity.

Currently, high profile individuals can licence their fame or image to another entity such as a related company or trust. Income for the use of their fame or image goes to the entity that holds the licence – creating the opportunity to manipulate different tax treatments. For example, if the rights are held by a discretionary trust the income generated from the use of these rights can be distributed to other family members and can potentially be taxed at lower rates than if the income was taxed in the hands of the individual.

This measure ensures that all remuneration (including payments and non-cash benefits) provided for the commercial exploitation of a person’s fame or image are included in the assessable income of that individual.

The ATO had previously released some draft guidelines (refer to PCG 2017/D11) in this area, possibly seeking to set some practical boundaries around the ability to split this type of income with others. Assuming the changes are legislated then these guidelines would appear to be redundant from 1 July 2019.

Medicare Levy Low Income Threshold Increase

Date of effect

2017-18 income years

The Medicare levy low income thresholds for singles, families, seniors and pensioners will increase from the 2017-18 income years.

2016-17

2017-18

Singles

$21,655

$21,980

Families

$36,541

$37,089

Single seniors and pensioners

$34,244

$34,758

Family threshold for seniors and pensioners

$47,670

$48,385

Each dependent child or student (increase to family threshold)

$3,356

$3,406

Encouraging Pensioner Financial Independence

Date of effect

From 2017-18

A range of measures seek to encourage pensioner financial independence:

Pension Work Bonus increase from $250 to $300 per fortnight – allowing pensioners to earn up to $7,800 each year without impacting their pension. This is in addition to the income free area, which is currently $168 a fortnight for a single pensioner and $300 a fortnight (combined) for a pensioner couple. A single person with no other income will be able to earn up to $468 a fortnight from work and get the maximum rate of Age Pension.

Pensioners will also continue to accrue unused amounts of the fortnightly Work Bonus, which can exempt future earnings from the pension income test. The maximum accrual amount will increase to $7,800.

The pension work bonus will also be expanded to allow self-employed retirees to earn up to $300 per fortnight without impacting their pension.

Example from the pension work bonus fact sheet

Nisha is a single part rate age pensioner who runs a small business. She earns an average of $1,000 a fortnight. Her assets are below the pension asset test free area. As Nisha’s income from self-employment is now eligible for the Work Bonus, the first $300 of her income will be excluded from the pension income test, and Nisha will receive a higher part-rate Age Pension. Her pension will increase by $150 per fortnight.

Amendments to the pension means test rules – new Age Pension means testing rules will be introduced for pooled lifetime income streams. The rules will assess a fixed 60% of all pooled lifetime product payments as income, and 60% of the purchase price of the product as assets until 84, or a minimum of 5 years, and then 30% for the rest of the person’s life.

Expansion of the pension loan scheme – the scheme, enabling Australians to use the equity in their homes to increase their incomes, will be extended to everyone over Age Pension age. The maximum fortnightly income stream will increase to 150% of the Age Pension rate.

Other

Medical Industry Growth Initiatives

Date of effect

From 2017-18

$1.3 billion over 10 years has been provided for a National Health and Medical Industry Growth Plan to improve health outcomes and develop Australia as a global destination for medical sector jobs, research and clinical trials.

The Government is looking to fund medical innovation that enhances the sustainability of the health system, delivers long term health benefits and strengthens partnerships between researchers, healthcare professionals, biomedtech firms, government and the community.

These investments, using proceeds from the Medical Research Future Fund (MRFF), will include:

$500 million over 10 years from 2017 18 committed to the Genomics Health Futures Mission, including $10.7 million in 2017 18 for genomics research;

$240 million committed to the Frontier Health and Medical Research program;

$248.0 million for expanded clinical trial programs;

$125.0 million over nine years from 2019 20 to contribute to the Targeted Translation Research Accelerator for chronic conditions focussed on diabetes and heart disease; and

$94.3 million for biomedtech programs and industry research collaborations.

Government agencies have also been provided with funding essentially to improve access and data sharing capabilities.

Investment In Science And Technology

Around $2.4 billion has been set aside for Australia’s public technology infrastructure, including supercomputers, satellite imagery, a national space agency, research into artificial intelligence and more accurate GPS. This includes $70 million this financial year to upgrade two supercomputers – one in Perth at the Pawsey Supercomputing Centre and the other at the Australian National University in Canberra.

In addition, $29.9 million has been set aside from 2018-19 to strengthen Australia’s capability in Artificial Intelligence (AI) and Machine Learning (ML).

Access To Digital Earth Satellite Imagery

Date of effect

From 2019-20

$36.9 million will be provided to give governments, businesses, researchers and individuals with access – through the Digital Earth Australia program – to reliable standardised satellite data.

This data can be used to build new digital products and services for commercial purposes, and to interpret and analyse changes to Australia’s physical landscape, enabling better understanding of environmental changes, such as coastal erosion, crop growth and water quality. Access to satellite imagery data has a broad range of applications including assisting farmers to monitor animal grazing patterns and increase the efficiency and utilisation of their land.

SME Export Hub

Date of effect

From 2018-2019

A Small and Medium Enterprises Export Hubs program will be established. The program seeks to enable co-operation and boost the export capability of local and regional businesses, through support to develop collective brands, leveraging local infrastructure to scale business operations, and positioning regional businesses to participate in global supply chains.

Funding For Asia Innovation Strategy

Date of effect

From 2018-2019

The Australia Innovation Strategy seeks to expand access to the Global Innovation Strategy grant program for Australian businesses and researchers in all countries, and establish a new funding stream within this program focused primarily on Asia.

Customs Tariffs Removed From Placebos And Clinical Trial Kits

Date of effect

1 July 2018

Customs tariffs will be removed from placebos and clinical trial kits that are imported into Australia.

More Funding For The ATO And Tax Practitioners Board

Scattered throughout the Budget are a series of funding initiatives directed to the ATO:

Debt – $133 million provided to increase debt collection and the improve the timeliness of those payments.

Black economy – $318.5 million over four years to implement strategies to target the black economy including a ‘black economy hotline’ where you can ‘dob in’ a tax evader! The funding replaces the existing black economy programs.

Individual compliance – $130.8 million to increase compliance activities targeting individual taxpayers and their tax agents. For example, the ATO will be able to continue focussing on foreign income derived by high wealth individuals. The ATO has also made it pretty clear that it will be looking closely at deductions claimed for work-related expenses.

Personal contributions to super – $3.1 million to improve the integrity of the ‘notice of intent’ (NOI) processes for claiming personal superannuation contribution tax deductions.

The Tax Practitioners Board will also receive $20.1 million over four years to assist the TPB in meeting its responsibilities to ensure that tax agents comply with both professional and ethical standards. The measure will be funded by an increase in tax practitioner registration fees.

Infrastructure & Investment

New Infrastructure Projects

$75 billion has been set aside for transport infrastructure including $24.5 billion in new projects. New projects include:

Roads of Strategic Importance:

$3.5 billion, including $1.5 billion for Northern Australia Package, $400 million for Tasmanian Roads Package, $100 million for NSW and ACT Barton Highway Corridor Package and $1.5 billion for future national priorities

$1 billion Urban Congestion Fund, and

$250 million for Major Project Business Case Fund.

Economic overview

The Government is very keen to push its economic credibility in this Budget – to the point that the Budget website is very glossy with a lot of ‘good news’ messages:

An economy in its 27th year of growth

Keeping taxes as a share of GDP within the 23.9% cap

No longer borrowing to fund everyday spending from 2018-19

Government payments as a share of GDP return to below the 30-year average of 24.8% in 2020-21, the first time since 2012-13.

Forecast budget surplus in 2021-22

The budget forecasts real GDP at a generous 3% from 2018-19. Total business investment is expected to be 4.5% in the current year (2017-18), before reducing back to 3% next year and then rising again to 4.5%.

CPI is expected to increase marginally from 2% to 2.5% in 2019-20.

Employment is flat. The wage price index is expected to be 2.25% this year before slowly increasing to 4.75% in 2019-20. Unemployment is expected to only reduce marginally to 5.25% from the current 5.5%. The participation rate is also not expected to increase (65.5%).

Many commentators have already pointed out that the budget forecasts the economy to have a quite remarkable growth spurt from its recently achieved gains.

Inside

– SINGLE TOUCH PAYROLL: WHAT YOU NEED TO KNOWFor employersFor employees

– Quote of the month

– SHOULD YOU USE THE NEW SUPER MEASURES WHEN YOU BUY/SELL YOUR HOME?The pros and cons of using your super to save for your first home The pros and cons of contributing proceeds from the sale of your home to super

Single Touch Payroll: what you need to know

Single Touch Payroll (STP) – the direct reporting of salary and wages, PAYG withholding and superannuation contribution information to the ATO – comes into effect from 1 July 2018.

For employers

Employers with 20 or more employees at 1 April 2018 must use standard business reporting-enabled software from 1 July 2018. The head count for ‘20 employees’ includes full-time, part-time, casuals (who worked any time during March), employees based overseas, or on paid or unpaid leave. Directors and independent contractors are excluded from the count. For businesses that are part of a wholly owned group, the total number of employees across the group is used (i.e., if the total number of employees employed by all member companies of the wholly-owned group is 20 or more, all group members must use STP).

STP is currently voluntary for businesses with less than 20 employees although proposed reforms seek to extend the reporting system to all employers by 1 July 2019, regardless of the number of employees.

What must be reported

STP requires PAYG withholding and superannuation contribution details to be reported to the ATO as payments are made to employees or superannuation funds.

When it comes to PAYG withholding, employers will report details of salary and wages paid to employees as well as the PAYG withholding amount at the time the payment is made to the employee. Employers have the option of paying the PAYG withholding liability at the same time, although this is not compulsory.

The Government intends to extend STP to salary sacrificed amounts in the near future although these reforms are not legislated.

An end to payment summaries?

While not compulsory, employers can choose to include reportable employer superannuation contributions and reportable fringe benefit amounts. These payments are reported either at the time the payment is made or through an update event. If these payments are included, the employer will not need to provide payment summaries as employees are able to access their live data through myGov.

If your business does not report through STP or does not finalise its reporting, payment summaries are still required.

New employees

If your business utilises STP, when a new employee joins they have the option to electronically complete a pre-filled Tax file number declaration and Superannuation standard choice form online instead of completing the form for you to lodge with the ATO.

Exemptions

Some exemptions exist for STP for rural employers that do not have access to a reliable internet connection, and employers that employed a group of people during the year for a short period of time, such as seasonal workers.

For employees

While the Government and ATO are promoting STP as a way to improve the efficiency of payroll processes and meeting reporting obligations (i.e., cutting down on duplication of work etc.,), there is also a clear benefit to the ATO and Government in implementing this system. One advantage is that the ATO will have early warning of businesses that are finding it difficult or simply failing to meet their PAYG withholding and superannuation guarantee obligations. This should have a flow on benefit to employees who might otherwise miss out on benefits to which they are entitled.

If you are registered with myGov and your employer reports using STP, you will be able to see your year-to-date tax and super information online.

Quote of the month

“Never give in except to convictions of honour and good sense.”
Winston Churchill

Should you use the new super measures when you buy/sell your home?

From 1 July 2018, new laws come into effect allowing first home buyers to use their super to help buy a home, and at the other end of the spectrum, downsizers to contribute proceeds from the sale of their home to super without many of the normal restrictions.

The pros and cons of using your super to save for your first home

The First Home Super Saver Scheme (FHSS) enables first-home buyers to save for a deposit inside their superannuation account, attracting the tax incentives and some of the earnings benefits of superannuation.

Home savers can make voluntary concessional contributions (for example by salary sacrificing) or non-concessional contributions (voluntary after-tax contributions) of $15,000 a year within existing caps, up to a total of $30,000. You have been able to make contributions since 1 July 2017 (although the legislation did not pass Parliament until 7 December 2017), but withdrawals cannot be made until 1 July 2018. Note that mandated employer contributions cannot be withdrawn under this scheme, it is only additional voluntary contributions made from 1 July 2017 that can be withdrawn.

If you have a Self-Managed Superannuation Fund (SMSF), you will need to ensure that the trust deed allows for withdrawals under the FHSS to be made. The SMSF must also identify these contributions and report these to the ATO.

When you are ready to buy a house, you can withdraw the contributions along with any deemed earnings (90-day Bank Accepted Bill rate with an uplift factor of 3%), to help fund a deposit on your first home. To extract the money from super, home savers apply to the Commissioner of Taxation for a first home super saver determination. The Commissioner then determines the maximum amount that can be released from the fund. When the amount is released from super, it is taxed at your marginal tax rate less a 30% offset (non-concessional contributions are not taxed).

The upside of the FHSS is the tax benefit. For example, if you earn $70,000 a year and make salary sacrifice contributions of $10,000 per year, after 3 years of saving, approximately $25,892 will be available for a deposit under the scheme – $6,210 more than if the saving had occurred in a standard deposit account (you can estimate the impact of the scheme on you using the estimator).

Another upside is that the scheme applies to individuals.So, if you are a couple, you both could utilise the scheme for a deposit on the same home – effectively increasing your cap to a maximum of $60,000.

If you don’t end up entering into a contract to purchase or construct a home within 12 months of withdrawing the deposit from superannuation, you can recontribute the amount to super, or pay an additional tax to unwind the concessional tax treatment that applied on the release of the money.

Home savers also need to move into the property as soon as practicable and occupy it for at least 6 of the first 12 months that it is practicable to do so.

The home saver scheme can only be used once by you.

The cons of this scheme are mostly administrative. On the investment side of things, using the above example, $6,210 over three years is an upside but may not be a huge upside compared to other investment returns given the administrative requirements of the scheme. But, for many, it may be the best offer available.

Who can use the first home saver scheme?

You must:
• Be 18 years of age or older (to make a withdrawal under the scheme – you can contribute before the age of 18);
• Never had held taxable Australian real property (this includes residential, investment, and commercial property assets)

The pros and cons of contributing proceeds from the sale of your home to super
From 1 July 2018, if you are over 65, have held your home for 10 years or more and are looking to sell, you might be able to contribute some of the proceeds of the sale of your home to superannuation.

The benefit of this measure is that you can contribute a lump sum of up to $300,000 per person to superannuation without being restricted by the existing work test requirements, non-concessional contribution caps or total superannuation balance rules. It’s a way of building your superannuation quickly and taking advantage of superannuation’s concessional tax rates. The $1.6 million transfer balance cap will continue to apply so your pension interests cannot exceed this amount. And, the Age Pension means test will continue to apply. If you are considering using this initiative, it will be important to get advice to ensure that you are eligible to use this measure and the contribution does not adversely affect your overall financial position.

The downsizer initiative applies to the sale of any dwelling in Australia – other than a caravan, houseboat or mobile home – that you or your spouse have held continuously for at least 10 years. Over those 10 years, the dwelling had to have been your main residence for at least part of the time. As long as you qualify for at least a partial main residence exemption under the CGT rules (or you would qualify for the exemption if a capital gain arose) you may be able to access the downsizer concession. This means that you do not actually need to have lived in the property for the full 10-year period.

The rules also take into account changes of ownership between two spouses over the 10-year period prior to the sale. This could assist in situations where a spouse who owned the property has died and their interest is inherited by their surviving spouse. The surviving spouse can count the ownership period of their deceased spouse in determining whether the 10-year ownership period test is satisfied. This rule could also assist in situations where assets have been transferred as a result of marriage or de facto relationship breakdown.

In general, the maximum downsizer contribution is $300,000 per contributor (so, $600,000 for a couple). The contribution needs to be made within 90 days after your home changes ownership (generally, the date of settlement) but you can apply to the Tax Commissioner to extend this period. And, the initiative only applies once – you cannot use it again for future properties.

If you have a SMSF contributions made under this scheme need to be reported to the ATO. You should also check the trust deed rules around the acceptance of contributions for members over the age of 65.

The eligibility requirements include:

• The contribution from the sale is made to a complying superannuation fund
• The contribution is equal to or less than the capital proceeds from the disposal of a main residence
• The member or their spouse had an eligible interest in the main residence before the sale
• The member, their spouse, their former spouse, or trustee of the deceased estate held an interest in the house during the prior 10 years
• No prior downsizer contribution has been made

Tax Deductions: the danger zones

A recent Parliamentary Inquiry into Tax Deductions created some fairly sensational headlines about what and how deductions are being claimed – $22 billion worth to be exact.

In Australia, tax deductions are available for expenses incurred in producing assessable income. These are generally work-related deductions or investment related deductions. And, unlike some other countries, these expenses can be offset against taxable income including wages (other countries only allow deductions relating to capital income against capital gains).

In a recent speech, the Tax Commissioner Chris Jordan highlighted that in 2014-15, more than $22 billion was claimed for work-related expenses. “While each of the individual amounts over-claimed is relatively small, the sum and overall revenue impact for the population involved could be significant – in the vicinity of, or even higher than the large market tax gap of $2.5 billion – and that’s just for this category of deductions, work-related expenses.”

He went on to say that in this same period around 6.3 million people made claims for clothing expenses totalling almost $1.8 billion. “That would mean that almost half of the individual taxpayer population was required to wear a uniform or protective clothing or had some special requirements for things like sunglasses and hats.” Clearly, that’s unlikely.

While the ATO is doing random audits of taxpayers making claims for work related expenses, the primary problem for the Commissioner is, as he says, that the individual amounts over-claimed are relatively small. The administrative cost of a crackdown is likely to be more than what would be gained. The likely ‘solution’ then is to change what taxpayers can claim.

If you want to see the likely ‘hit list’ of deductions with a potentially short future, then Treasury’s submission to the Inquiry is a starting point:

Investment expenses

Investment related expenses can include management fees for an investment, account-keeping fees, insurance, land tax, depreciation, maintenance expenses, and interest on borrowings used to purchase an income-producing asset. While expenses can be claimed for a wide array of income producing assets, property is where most of the activity is centred.

$41.7 billion in rental expenses were claimed in 2012-13 against $36.5 billion of rental income. Two thirds of taxpayers with rental income in this same period made a loss (totalling net rental losses of $12 billion). Negative gearing is popular. As an investment strategy, negative gearing makes sense if the expected capital gain when the property is sold exceeds the rental losses over the life of the investment. However, there is little doubt that the ability to reduce personal income tax using investment property losses is an attractive and viable strategy for high income earners.

The Grattan Institute’s submission to the Inquiry flags two potential scenarios. First is quarantining losses against investment income only. That is, you would lose the ability to offset investment losses against salary and wages and instead could only offset these against capital profits or gains. Or, an alternative strategy is that taxes on gains and losses could be aligned so that if you were entitled to a 50% reduction on a capital gain, you would only be entitled to an equivalent deduction for expenses.

When it comes to convincing voters that cutting back on deductions is a good thing, investment related deductions are generally targeted as they are not as transparent and are generally attributed to more affluent members of the community (although this is not an accurate picture as many self-funded retirees and Mum & Dad property investors will tell you).

With the next election just around the corner, it’s unlikely we will see a major overhaul in the very near future. The path of least resistance is to reduce the discount on capital gains available to individuals, trusts, and superannuation funds. It’s more likely however that the regulators will continue to whittle away deductions rather than making wholesale changes – as we have already seen with the recent changes impacting residential investment property – while relying on the ATO to reign in excessive claims.

Work related expenses

At $19.7 billion, work-related expenses accounted for nearly two thirds of total deductions claimed by individuals in 2012-13. The most common claims were for car expenses ($8 billion or around 40%), followed by $7 billion in ‘other expenses’ comprising home office costs and tools, equipment and other assets. Work related travel expenses counted for $2 billion, uniforms $1.6 billion, and $1.1 billion for work related self-education expenses. Unsurprisingly, if you follow the money you can see that the pattern of expense claims closely follow the ATO’s compliance focus and activities.

By comparison, New Zealand does not allow work related deductions (but they have a top personal tax rate of 33%). In other countries, the range of deductions that can be claimed is much narrower. In the UK for example, only certain occupations can claim work related expenses and then generally this is at a flat rate. Taxpayers have the ability to claim outside of the flat rate but only after passing stringent tests. The tests require that the item must be ‘wholly, exclusively and necessarily in the performance of an employee’s duties’ and be an expense typical for the industry. That is, the item is only deductible if it is likely to be incurred by every holder of that form of employment (it is not enough that one employee, or a subset of employees, happens to incur the expense).

It would be a bold and confident Government that removed the ability for many taxpayers to claim a tax refund. As with investment expenses, it is more likely that deductions will be slowly whittled away.

Inside
- THE ATO’S FBT HOT SPOTS
Motor Vehicles – using the company car outside of work Utes and commercial vehicles – the new safe harbour to avoid
Car parking
Living away from home allowances Salary sacrifice or employee contribution?
- POWER AND INFLUENCE
The other business influencer that can make or break you
- GST ON PROPERTY DEVELOPMENTS
The big changes for developers and purchasers
For the purchaser
For the developer (vendor)
- WILL YOUR BUSINESS BE AUDITED?
How the ATO identifies audit targets

The ATO’s FBT Hot Spots

The Fringe Benefits Tax (FBT) year ends on 31 March. We’ve outlined the key hot spots for employers and employees.

Motor Vehicles – using the company car outside of work

Just because your business buys a motor vehicle and it is used as a work vehicle, that alone does not mean that the car is exempt from FBT. If you use the car for private purposes – pick the kids up from school, do the shopping, use it freely on weekends, garage it at home, your spouse uses it – FBT is likely to apply. While we’re sure the old, “what the ATO doesn’t know won’t hurt them” mentality often applies when the FBT returns are completed, it might not be enough. The private use of work vehicles is firmly in the sites of the Australian Tax Office (ATO).

Private use is when you use a car provided by your employer (this includes directors) outside of simply travelling for work related purposes.

If the work vehicle is garaged at or near your home, even if only for security reasons, it is taken to be available for private use regardless of whether or not you have permission to use the car privately. Similarly, where the place of employment and residence are the same, the car is taken to be available for the private use of the employee.

Finding out that a car has been used for non work-related purposes is not that difficult. Often, the odometer readings don’t match the work schedule of the business. These are areas the ATO will be looking at.

Utes and commercial vehicles – the new safe harbour to avoid FBT

When an employer provides an employee with the use of a car or other vehicle then this would generally be treated as a car fringe benefit or residual fringe benefit and could potentially trigger an FBT liability.

However, the FBT Act contains some exemptions which can apply in situations where certain vehicles (utes and other commercial vehicles for example) are provided and the private use of the vehicles is limited to work-related travel, and other private use that is ‘minor, infrequent and irregular’.

One of the practical challenges when applying the exemption is how to determine if private use has been minor, infrequent and irregular. The ATO recently released a compliance guide that spells out what the regulator will look for when reviewing the use of the exemption.

The ATO has indicated that in general, private use by an employee will qualify for the exemption where:

The employer provides an eligible vehicle to the employee to perform their work duties. An eligible vehicle is generally a vehicle for commercial purposes. The requirements are very strict and guidance on this is published on the ATO website.

The employer takes reasonable steps to limit private use and they have measures in place to monitor this – this might be a policy on the private use of vehicles that is monitored using odometer readings to compare business kilometres and home to work kilometres travelled by the employee against the total kilometres travelled.

The vehicle has no non-business accessories – for example a child safety seat.

The value of the vehicle when it was acquired was less than the luxury car tax threshold ($75,526 for fuel efficient vehicles in 2017-18 and $65,094 for other vehicles).

The vehicle is not provided as part of a salary sacrifice arrangement; and

The employee uses the vehicle to travel between their home and their place of work and any diversion adds no more than two kilometres to the ordinary length of that trip, they travel no more than 750 km in total for each FBT year for multiple journeys taken for a wholly private purpose and, no single, return journey for a wholly private purpose exceeds 200 km.

If you meet all these specifications, the ATO has stated that it will not investigate the use of the FBT exemption further. However, the employer will still need to keep records to prove that the conditions above have been satisfied and to show that private use is restricted and monitored.

Car parking

We all know how expensive commercial car parks can be. The ATO has noticed that where car parking benefits are being declared (that is, where an employer provides parking to an employee), the value of what is being declared is significantly less than what you would expect to pay.

Common errors include:

Market valuations that are significantly less than the fees charged for parking within a one kilometre radius of the premises on which the car is parked;

Using parking rates or facilities not readily identifiable as a commercial parking station;

Rates charged for monthly parking on properties purchased for future development that do not have any car parking infrastructure;

and Insufficient evidence to support the rates used as the lowest fee charged for all day parking by a commercial parking station.

Rates charged for monthly parking on properties purchased for future development that do not have

Living away from home allowances

Living Away From Home Allowances (LAFHA) continue to cause confusion for both employers and employees.

A LAFHA is an allowance paid to an employee by their employer to compensate for additional expenses they incur, and any disadvantages suffered because the employee’s job requires them to live away from their normal residence.

As a starting point, FBT applies to the full amount of the allowance that has been paid. However, if certain strict conditions can be satisfied the taxable value of the LAFHA fringe benefit can be reduced by the exempt accommodation and/or food component.

Common errors include:

Mischaracterising an employee as living away from home when they are really just travelling in the course of their work.

Failing to obtain the declarations required from employees who have been provided with a LAFHA.

Claiming a reduction in the taxable value of the LAFHA benefit for exempt accommodation and food components in circumstances that don’t meet the criteria.

Failing to substantiate accommodation expenses and, where required, food or drink. Verifying accommodation expenses is important as the ATO will look closely for scenarios where employees are paid an allowance but go and stay with friends or relatives or stay somewhere cheaper and pocket the difference. The expense actually has to be incurred and substantiated.

Salary sacrifice or employee contribution?

One issue that frequently causes confusion is the difference between the employee salary sacrificing in order to receive a fringe benefit and making an employee contribution towards the value of that fringe benefit.

Salary sacrificing for a fringe benefit

To be an effective salary sacrifice arrangement (SSA), the agreement must be entered into before the employee becomes entitled to the income (e.g., before the period in which they start to perform the services that will result in the payment of salary etc.).

Where an employee has salary sacrificed on a pre-tax basis towards the fringe benefit provided – laptop, car, etc., they have agreed to give up a portion of their gross salary on a pre-tax basis and receive the relevant fringe benefit instead.

As a starting point, the taxable value of the fringe benefit is the full value of the expense paid by the employer.

The employer recognises a lower cost of salary and wages provided to the employee as their ‘cost saving’, which results in lower PAYG withholding and superannuation contribution obligations, but they still recognise the full value of the fringe benefit as part of their taxable fringe benefit which is subject to FBT.

The employee recognises that they have a reduced amount of salary and wages, and a non-cash benefit in the form of the fringe benefit.

What is an employee contribution?

An employee contribution is made from post-tax income and will often form part of arrangements relating to car fringe benefits. The employee recognises the gross salary and wages as income in their tax return. However, the payment of an after-tax employee contribution would generally have the effect of reducing the taxable value of the fringe benefit that was provided to them by the employer.

The employer would still be subject to the ‘standard’ PAYG withholding and superannuation contribution obligations in relation to the gross salary and wages amount.

The ATO is looking for discrepancies with contributions paid by an employee to ensure that these have been treated consistently for income tax and GST purposes as well as on the FBT return. This is really an issue for the employer and a discrepancy may mean that there is an FBT exposure or that the employer has paid less GST or income tax than what they should have.

Power And Influence

The other business influencer that can make or break you

Did a Kardashian really just wipe US $1.3bn off the share price of Snapchat?

A tweet from Kylie Jenner saying “sooo does anyone else not open Snapchat anymore? Or is it just me… ugh this is so sad” is being credited as the catalyst for an 8% drop in Snap* Inc’s share price.

While the price clawed back 2% that same day, and Jenner softened her commentary with another tweet saying, “still love you tho snap … my first love,” the effectiveness of Snapchat’s strategic direction had already been judged by its own social media jury.

The share price of Snap rose to a high of US$20.75 from AU$14.06 with the release of the update but had been buffeted by negative feedback. The share price had been gradually falling since 16 February. Jenner’s tweet made that decline a much sharper decent.

When an influencer has 24.5 million followers on Twitter, anything she says penetrates faster than mainstream media. Jenner’s Snapchat commentary attracted over 300,000 likes and over 64,000 comments. While it is ironic that a Kardashian dropped the share price of a product that has been her rocket to fame, it demonstrates the speed at which trend based businesses can rise and fall. Remember Pokemon? Nintendo went from its core user base to a world wide trend. After rising to massive heights in 2016 the use of Pokemon has declined rapidly. The lesson is to have a strategy to capitalise on the trend and sustain it for as long as possible, and never forget your core client base – your core still needs to be there when the trend is over.

It’s common for businesses to work through a list of external influencers and stakeholders to manage risk. Normally, the list considers Government regulation, environmental factors such as location, competitors, and changes in the marketplace but the cycle of impact of external influences has become much shorter. It’s unusual to have a celebrity in the mix but the positive impact of a celebrity adopting your brand is undeniable.

Jimmy Choo credits Princess Diana’s stylish influence as a catalyst for taking the brand from simply beautiful to desirable – a trend that has not significantly diminished. Kaftan designer Camilla became globally recognised after Oprah Winfrey wore her colourful designs. And, when Kate Middleton wears a Topshop outfit it sells out almost immediately.

The problem for businesses whose products become a trend is that trends go both ways – exponential growth and sharp decline. You are either in the spotlight or you’re not.

* Snapchat’s parent company

GST on property developments

The big changes for developers and purchasers

If a Bill currently before Parliament passes, from 1 July 2018, purchasers of new residential premises or new residential subdivisions will need to remit the GST on the purchase price directly to the ATO as part of the settlement process.

This is a significant change from how GST is currently managed with the developer collecting the full proceeds and remitting GST to the ATO in their next BAS (which can be up to three months after settlement). The reforms are aimed at preventing developers from dissolving the business before the next BAS lodgement to avoid remitting the GST.

For some developers there will be a significant cash flow impact because the purchaser will be required to pay 1/11th of the full sale price to the ATO, even if the developer’s GST liability on the sale would be less than this (e.g., where they can apply the GST margin scheme). In these cases developers will need to seek a refund from the ATO.

The reforms apply to the sale or long-term lease of:

new residential premises (other than those created through a substantial renovation and commercial residential premises); or

subdivisions of potential residential land.

For the purchaser

If you are purchasing a new property affected by the changes after 1 July 2018, you will need to pay 1/11th of the full sale price directly to the ATO at settlement.

The vendor must supply you with a notification advising that the payment is required and the amount that is to be paid.

For the developer (vendor)

From 1 July 2018, the vendor will no longer collect and remit GST on the purchase price of the residential premises. Instead, the vendor must notify the purchaser in writing that the GST needs to be paid to the Commissioner and advise the amount that must be paid. The amount to be paid is simply 1/11th of the full sale price, regardless of whether the vendor is eligible to apply the margin scheme to reduce the GST liability associated with the transaction. In general, this notification will need to include:

the name and ABN of the entity that made the supply;

when the purchaser is required to pay that amount to the Commissioner (generally settlement date); and

where some or all of the consideration is not expressed as an amount of money (e.g., sale of property for cash plus another property) – the GST-inclusive market value of the consideration that is not expressed as an amount of money.

Vendors that fail to provide this notification face fines of up to $21,000 per event.

The vendor will receive a credit for the amount that has been paid by the purchaser to the ATO (if the amount was simply withheld but not paid these amounts cannot be claimed). If the vendor’s net amount for the tax period is in a credit, a refund will be made.

It’s expected that the new rules will generally be incorporated into the settlement process but it is something that developers and purchasers will need to be across for any affected property with a settlement date of 1 July 2018 onwards.

If you are developing property and are concerned about the impact of the reforms, please contact us.

Will your business be audited?

How the ATO identifies audit targets

The ATO is very upfront when it comes to their compliance activity.

Every year they publish small business benchmarks that outline what a typical business ‘looks like’ in different industries. If your business falls outside of those benchmarks, the ATO is likely to take a closer look at why that is.

Falling outside of the benchmarks might not indicate a tax related problem. It might mean that your business has a different business model to the norm or is performing poorly relative to others in the industry. If your business does fall outside of the benchmark however, it is important to ensure that the reasons why can be clearly articulated (preferably documented) and the reason for those differences is not tax evasion. If there is no proof as to why the business is outside of the benchmarks, the ATO is likely to simply apply the benchmark ratio and issue a revised tax assessment.

The ATO look at:

cost of sales to turnover (excluding labour)

total expenses to turnover

rent to turnover

labour to turnover

motor vehicle expenses to turnover

non-capital purchases to total sales, and

GST-free sales to total sales.

For example, for a veterinary practice with a turnover between $300,001 and $800,00, the cost of sales to turnover ratio is expected to be between 25% and 29% (averaging at 27%), and average total expenses are 78%. The cost of labour to turnover ratio is between 21% and 29% and rent is between 5% and 8%.

The benchmarks are also a useful tool for anyone wanting to understand what is typical in their industry and how they perform against the average. It might also indicate opportunities for improvement and where the business is falling behind its competitors.

Inside
- New data breach laws come into effect
The new data breach rules – who is affected and what you need to do.
- Directors on ‘hit list’ for not paying employee super
New legislation will give the ATO the power to seek criminal penalties for Directors who fail to pay superannuation guarantee.
- What’s changing in 2018
The changes coming in from 1 January 2018.

New data breach laws come into effect

New data breach rules in effect from 22 February 2018 place an onus on business to protect and notify individuals whose personal information is involved in a data breach that is likely to result in ‘serious harm’.

In October last year, almost 50,000 employee records from Australian Government agencies, banks and a utility were exposed and compromised because of a misconfigured cloud based ‘Amazon S3 bucket’. AMP was reportedly one of the worst affected with 25,000 leaked employee records. ITNews reports that the data breach was discovered by a Polish researcher who conducted a search for Amazon S3 buckets set to open, with “dev”, “stage”, or “prod” in the domain name. One contractor appears to be behind the breach.

In October 2016, the details of over half a million Red Cross blood donors were inadvertently exposed after a website contractor created an insecure data backup. In the US, a massive data breach exposed the credit records (including social security records) of over 145 million Americans – all because an IT worker didn’t open an email about a critical patch for their software.

Regardless of how good your existing systems are, data breaches are a reality either through human error, mischief, or simply because those looking for ways to disrupt are often one step ahead. But it’s not all about IT, there have been numerous cases of hard copy records being disposed of inappropriately, employees allowing viruses to penetrate servers after opening the wrong email, and sensitive data on USBs lost on the way home.

Who is covered by the data breach scheme?

The Notifiable Data Breach (NDB) Scheme affects organisations covered by the Privacy Act – that is, organisations with an annual turnover of $3 million or more. But, if your business is ‘related to’ another business covered by the Privacy Act, deals with health records (including gyms, child care centres, natural health providers, etc.,), or a credit provider etc., then your business is also affected (see the full list). Special responsibilities also exist for the handling of tax file numbers, credit information and information contained on the Personal Property Securities Register.

What you need to do

It’s important to keep in mind that complying with these new laws means more than notifying your database when something goes wrong. Organisations are required to take all reasonable steps to prevent a breach occurring in the first place, put in place the systems and procedures to identify and assess a breach, and issue a notification if a breach is likely to cause ‘serious harm’.

Taking all reasonable steps – assessing risk

The Privacy Act already requires organisations to take all reasonable steps to protect personal information. The new data breach laws merely add an additional layer to assess breaches and notify where the breach poses a threat. For example, if you have not already, you should assess issues such as:

How personal information flows into and out of your business. For example:

What information do you gather (including IP data from websites)

What information do you provide (for example, do you provide information on your clients to third parties?)

Where private information is stored – map out what systems you use, where these systems store data (if cloud based, your data may be held in a foreign country), what level of security is provided within those systems, and what level of access each team member has (and what they should have access to for their role)

How private information is handled by your business across its lifecycle and who has access at each stage (not just who is accessing the information for their work but who ‘could’ access this information)

Possible impacts on an individuals’ privacy (risk assessment)

The policies and procedures in place to manage private information, including risk management and mitigation, whether these are adhered to, and actively managed

The policy review process – review policies and procedures at least annually but again with the introduction of new systems and technology. Remember, you can’t just have a policy sitting somewhere, it needs to be actively reinforced and adopted by team members

Instate new project protocols for ensuring privacy where personal information is at risk

Document everything including your reviews and procedural updates even if nothing changed. If there is ever an issue where your business’s culpability is assessed, your capacity to prove that you took all reasonable steps will be important.

When it comes to data breaches, all organisations must have a data breach response plan. The data breach plan covers the:

Actions to be taken if a breach is suspected, discovered or reported by a staff member, including when it is to be escalated to the response team

Members of your data breach response team (response team), and

Actions the response team is expected to take.

The Office of the Australian Information Commissioner provides sample breach response plan.

Identifying a serious breach

So, what is a serious breach? A breach has occurred when there is unauthorised access to or disclosure of personal information or a loss of personal information that your business holds. Whether a breach is serious is subjective but may include serious physical, psychological, emotional, financial, or reputational harm. If a breach occurs, you need to think through how that information could be used for identity theft, financial loss, threats to physical safety (for example someone’s home address), job loss, humiliation or reputational damage, or workplace bullying or marginalisation.

If you suspect a breach has occurred, your business is obliged to take “reasonable” and “expeditious” action regardless of whether you think it is serious or not (under the NDB scheme you have a maximum of 30 days to assess the damage and respond but in general, the first 24 hours is often crucial to the success of your response). Ignorance is not a defence. A lack of systems to identify system breaches fails the Privacy Act’s requirement to take all reasonable steps to protect personal information. As soon as a breach is identified anywhere in the business, whether it is IT based or physical, steps need to be taken – even if it is simply noting that no further action is required.

If you suspect a data breach has occurred that may meet the threshold of ‘likely to result in serious harm’, you must conduct an assessment. Sounds simple right?

But the problem for business is often that there are initially no definitive answers about the extent of a breach or its seriousness for the assessment to take place. Take the example of a retail business with an online store. A hacker exploiting an unpatched vulnerability in your customer relationship management (CRM) system gains access to the customer database for your online store, which includes customer purchase histories and contact details. IT calls you and tells you there is a problem but can’t tell you how, what customer records are affected, and if the records have been compromised. You don’t want to scare your customers by advising of a breach but you don’t know that yet. What do you do? The first step is generally to contain the damage – isolate or shut the affected system down to prevent further potential loss – then assess the scenario quickly – not just because of the NDB scheme but because your business’s reputation is on the line.

Notifying a breach

If a breach is assessed to potentially result in serious harm, you are obliged to advise affected individuals and the Australian Information Commissioner. You have the option to:

Notify all individuals whose personal information is involved in the eligible data breach

Notify only the individuals who are at likely risk of serious harm

Publish your notification, and publicise it with the aim of bringing it to the attention of all individuals at likely risk of serious harm.

You advise the Australian Information Commissioner of a serious potential breach using the Notifiable Data Breach statement — Form.

And it’s not just Australia. Does your business have international connections?

Data breaches are common and many countries have moved to ensure that the personal information of individuals is protected. If your business operates overseas or has customers overseas you need to be aware of the requirements in those countries.

Most US states have compulsory data breach requirements. The European Union’s General Data Protection Regulation (GDPR) comes into effect from 25 May 2018. If you operate through a local distributor in the European Union or have direct supply into those countries then it’s likely your business will be caught by the Regulation.

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Directors on ‘hit list’ for not paying employee super

Proposed legislation would see the ATO pursue criminal charges against Directors who fail to meet their superannuation guarantee (SG) obligations.

An analysis by Industry Super Australia submitted to the Economics References Committee into Wage Theft andSuperannuation Guarantee Non-compliance, indicates that employers failed to pay an aggregate amount of $5.6 billion in SG contributions in 2013-14. On average, that represents 2.76 million affected employees, with an average amount of over $2,000 lost per person in a single year. The ATO’s own risk assessments suggest that between 11% and 20% of employers could be non-compliant with their SG obligations and that non-compliance is “endemic, especially in small businesses and industries where a large number of cash transactions and contracting arrangements occur.”

At present, under reporting or non-payment of SG is usually discovered when the employer misses the quarterly payment schedule or from the ATO’s hotline.

New legislation seeks to introduce a series of changes to how employers interact with the SG system and give some teeth to the ATO to pursue recalcitrant employers. The new rules, if passed by Parliament, generally come into effect from 1 July 2018.

The key changes include:

The ATO can force you to be educated about your SG obligations

At present, if an employer fails to meet their quarterly SG payment on time they need to pay the SG charge (SGC) and lodge a Superannuation Guarantee Statement. The SGC applies even if you pay the outstanding SG soon after the deadline. The SGC is particularly painful for employers because it is comprised of:

The employee’s superannuation guarantee shortfall amount – so, all of the SG owing

Interest of 10% per annum, and

An administration fee of $20 for each employee with a shortfall per quarter.

Unlike normal SG contributions, SGC amounts are not deductible, even if you pay the outstanding amount. That is, if you pay SG late, you can no longer deduct the SG amount even if you bring the payment up to date.

And, the calculation for SGC is different to how you calculate SG. The SGC is calculated using the employee’s salary or wages rather than their ordinary time earnings.

An employee’s salary and wages may be higher than their ordinary time earnings particularly if you have workers who are paid for overtime.

Under the quarterly superannuation guarantee, the interest component will be calculated on an employer’s quarterly shortfall amount from the first day of the relevant quarter to the date when the SG charge would be payable.

Where attempts have failed to recover SG from the employer, the directors of a company automatically become personally liable for a penalty equal to the unpaid amount.

Under the proposed rules, the ATO will also have the ability to issue directions to an employer who fails to comply with their obligations. The Commissioner can direct an employer to undertake an approved course relating to their SG obligations where the Commissioner reasonably believes there has been a failure by the employer to comply with their SG obligations, and, of course, a direction to pay unpaid and overdue liabilities within a certain timeframe.

Criminal penalties for failure to comply with a direction to pay

Employers who fail to comply with a directive from the Commissioner to pay an outstanding SG liability face fines and up to 12 months in prison. Before hauling anyone off to prison the ATO has to consider the severity of the contravention including:

The employer’s history of compliance (superannuation and general tax obligations)

The amount of unpaid super relative to the employer’s size

And steps taken by the employer to pay the liability, and

Any matters the “Commissioner considers relevant”.

The ATO will tell employees if an employer is under paying or not paying SG

The proposed new rules will allow the ATO to tell current and former employees about the failure (or suspected failure) of an employer to comply with their SG obligations. The ATO can also advise the employees what action has been taken by the ATO to recover their SG.

This disclosure cannot relate to the general financial affairs of the employer.

Extension of Single Touch Payroll to all employers

Single Touch Payroll – the direct reporting of salary and wages, PAYG withholding and superannuation contribution information to the ATO – will be compulsory from 1 July 2018 for employers with 20 or more employees. Under the proposed rules, this system would be extended to all employers by 1 July 2019.

In addition, Single Touch Reporting will extend to the reporting of salary scarified amounts.

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What’s changing in 2018?

1 January 2018

Vacancy fees for foreign acquisitions of residential land – An annual vacancy fee imposed on foreign owners of residential real estate if the property is not occupied or genuinely available on the rental market for at least 183 days in a particular 12 month period. Foreign owners can avoid the fee by living in the property (or have a family member live in the property), leasing the property, or making it available for rent, for a total of 183 days in a 12 month period. Short term letting arrangements often won’t be sufficient to avoid the levy.

CGT concession for investments in affordable housing – The CGT discount will be increased for individuals who choose to invest in affordable housing. The current 50% discount will increase by 10% to 60% for resident individuals who elect to invest in qualifying affordable housing. Non-residents are not

generally eligible for the CGT discount. This change is not yetlegislated.

1 July 2018

Super concessions for downsizers come into effect – If you are over 65, have held your home for 10 years or more and are looking to sell, you can contribute a lump sum of up to $300,000 per person to superannuation without being restricted by the existing non-concessional contribution caps – or age restrictions.

Using super to save for your first home – The first home savers scheme will enable first-home buyers to save for a deposit inside their superannuation account, attracting the tax incentives and some of the earnings benefits of superannuation. Home savers can make voluntary concessional contributions (for example by salary sacrificing) or non-concessional contributions (voluntary after-tax contributions) of $15,000 a year within existing caps, up to a total of $30,000. When you are ready to buy a house, you can withdraw those contributions along with any deemed earnings in order to help fund a deposit on your first home.

GST on low value imported goods – GST will apply to retail sales of low value physical goods ($1,000 or less) that have been imported into Australia and sold to consumers.

Who pays the GST on residential property & subdivisions – Property developers will no longer manage the GST on sales of newly constructed residential properties or new subdivisions. Instead, the Government will require purchasers to remit the

GST directly to the ATO as part of the settlement process. Thischange is not yet legislated.

$20k immediate deductions ends – The $20,000 immediate deduction threshold for assets purchased by businesses with an aggregated turnover of under $10 million ends 30 June 2018.

Taxable payments reporting system extended to couriers & cleaners – Businesses in the courier and cleaning industries will need to collect information from 1 July 2018, with the first annual report required to be lodged in August 2019.

Single Touch Payroll – Single Touch Payroll reporting starts for employers with 20 or more employees. Employers will report payments such as salaries and wages, PAYG withholding and super information directly to the ATO from their payroll system at the same time they pay their employees.

Closing salary sacrifice loopholes to reduce super guarantee – Loopholes enabling employers to reduce Superannuation Guarantee contributions by using salary sacrifice contributions will be closed. This change is not yetlegislated.

Access to reduced company tax rate limited – Limits access to the 5% company tax rate by replacing the existing ‘carrying on a business test’ with a passive income test. Under the new rules, a company will not be able to access the reduced company tax rate if more than 80% its assessable income is passive in nature. This change is not yetlegislated.

Wine equalisation tax rebate tightened eligibility – Wine producers will be required to own at least 85% of the grapes used to make the wine throughout the winemaking process and brand wine with a trademark.

No temporary budget repair levy – The Budget repair levy that imposed an additional 2% to the tax rate for every dollar of a taxpayer’s annual taxable income over $180,000 ends on 30 June 2018.

Tax benefits for investing in affordable housing.

In the 2017-18 Federal Budget the Government announced a series of measures intended to improve housing affordability in Australia. To entice investors, the Government is providing an increase in the CGT discount for individuals who choose to invest in affordable housing.

The draft legislation enabling this change has now been released so we can see the detail.

There are two aspects to these changes. Firstly, individuals who make a capital gain on residential dwellings that have been used to provide affordable housing can potentially qualify for an additional CGT discount of up to 10%, this could take the total discount percentage from the existing maximum level of 50% to 60%. While the additional 10% CGT discount applies if you meet the eligibility criteria, the 60% discount rate is not automatic – it’s ‘up to’ and the final total discount could be less than 60%.

The increased discount will only be available if the dwelling has been used to provide affordable housing for at least 3 years after 1 January 2018. The 3 year period does need to have been continuous.

The additional discount needs to be apportioned to take into account periods when the individual was a non-resident or temporary resident as well as periods when the property was not used to provide affordable housing over its ownership period.

The second aspect to the rules allows individuals to also access an additional 10% CGT discount on their share of capital gains that are distributed by a certain trust (e.g., managed investment trusts) where the gain is attributable to dwellings that have been used to provide affordable housing for at least 3 years.

Affordable housing is….
There are a few compliance hoops to jump through to be ‘affordable housing’.
• The property must be residential (not commercial)
• the tenancy of the dwelling or its occupancy is exclusively managed by an eligible community housing provider;
• the eligible community housing provider has given each entity that holds an ownership interest in the dwelling certification that the dwelling was used to provide affordable housing;
• no entity that has an ownership interest in the dwelling is entitled to receive a National Rental Affordability Scheme (NRAS) incentive for the NRAS year; and
• if the ownership interest in the dwelling is owned by a Managed Investment Trust, the tenant does not have an interest in the MIT.

Safe harbour for directors of struggling companies.

Australia’s insolvent trading laws impose harsh penalties on directors of companies that trade where there are reasonable grounds to suspect that the company is insolvent. Criminal and civil penalties can apply personally including penalties of up to $200,000, compensation proceedings by creditors or liquidators, and where dishonesty has been involved, up to 5 years in prison.

You can understand why directors might choose to place a company into administration rather than face personal risk. Section 588G(2) of the Corporations Act imposes personal liabilities if a person is a director at the time the company incurs a debt, and the company is insolvent or becomes insolvent by incurring that debt, and, at that time, there are reasonable grounds to suspect that the company is or would become insolvent. It’s all about timing.

The threat of Australia’s insolvent trading laws, combined with uncertainty over the precise moment a company becomes insolvent have been widely criticised as driving directors towards voluntary administration even in circumstances where the company may be viable in the longer term. And, the very real personal risk is often cited as a reason why experienced directors are unwilling to engage with angel investors and start-ups.

New safe harbour provisions give directors some ‘wiggle room’ where they are attempting to restructure a company outside of a formal insolvency process.

Under the new rules, directors will only be liable for debts incurred while the company was insolvent if they were not developing or taking a course of action that at the time was reasonably likely to lead to a better outcome for the company than proceeding to immediate administration or liquidation. The explanatory memorandum to the amending legislation however clearly states that “hope is not a strategy” when it comes to assessing the reasonableness of the actions taken by directors.

Tolerance levels of the new laws.
The new laws give directors a safe harbour from the civil insolvent trading provisions of the Corporations Act but only where the company is up to date with employee entitlements including superannuation, and has met its tax obligations – normally the first thing to go in distressed companies.

The amendments create a safe harbour for “honest and diligent company directors from personal liability for insolvent trading if they are pursuing a restructure outside formal insolvency.” Directors who merely take a passive approach or allow the company to continue trading as usual during severe financial difficulty, or whose recovery plans are “fanciful”, will not be protected. Directors who fail to implement a course of action, or to appoint an administrator or liquidator within a reasonable time period of identifying severe financial difficulty will also lose the benefit of the safe harbour.

What does all this mean?
The new rules do not soften the requirement for directors to stay informed about the welfare of the company. It merely provides protection where there is a reasonable chance of a turnaround from insolvency. To utilise the safe harbour, directors will need to demonstrate that they took action that “could lead to a better outcome” such as:

• Accessing the right information to make timely and informed decisions – engage professional advice to assess the company’s solvency and provide the right information at meaningful time periods. As soon as the company’s solvency is questionable, steps should be taken to ensure further debts are not incurred. The result of this assessment might be that the company is not able to reasonably turnaround its financial position.
• Assess if the safe harbour could apply – A decision to utilise the safe harbour provisions should be taken at Board level. Professional advice should be taken to review eligibility and viability of accessing the safe harbour provisions.
• Develop a plan – document a plan with measureable and realistic targets. You need to demonstrate that the plan is “reasonably likely to lead to a better outcome” for the company. Any contracts the company has entered into also need to be reviewed as part of that plan.
• Measure and adjust – The plan should not only be followed but also regularly assessed and amended where required for changing circumstances. Directors have an obligation to understand the point at which the plan is not working and to work co-operatively with liquidators or administrators. The safe harbour does not protect directors who do not keep tight controls on the viability of a turnaround plan. Keep informed and realistically assess the company’s position.

Can the company incur debt while insolvent?
The safe harbour provides protection for debts “incurred directly or indirectly in connection with” actions taken to turnaround the company. It includes debts taken on for the specific purpose of the restructure such as a professional adviser. Even in circumstances where a company’s solvency is doubtful, incurring debts may be a reasonable course of action to lead to a better outcome, and it may remain in the interests of the company that some loss-making trade should be accepted – for example, incurring debts associated with the sale of assets which would help the business’s overall financial position.

While hindsight might demonstrate that the path taken was the wrong one, directors are protected if they can demonstrate that the course of action was reasonably likely to lead to a better outcome at the time the decision was made. The safe harbour does not protect from debts incurred outside of the turnaround actions.

Solvency is an issue that arises for companies of all sizes; particularly those on a fast growth trajectory. It’s essential that directors have the right information available to them to manage these periods of uncertainty. Employee and tax payments, and tax reporting should never be missed as these are the first sign of deeper problems and likely to trigger further investigation or audit by the regulators. If the company needs help, get help. Hope is not a strategy.

What you need to tell the ATO about your SMSF.

The 1 July 2017 superannuation reforms introduced a new reporting regime for funds. Funds now need to advise the ATO of key events within the fund that impact on retirement income streams (pensions):

• When you start a pension
• When you stop a pension or take a lump sum
• When the fund accepts a structured settlement contribution such as personal injury compensation.

Superannuation funds are also required to report the value of existing superannuation income streams at 30 June 2017.

While reporting of these events to the ATO does not formally start until 1 July 2018 for SMSFs, event based reporting still needs to be completed if these events occur from 1 July 2017 – that is, you have a reprieve from the compliance but not the actual reporting.

If we are managing your SMSF’s accounting and compliance, we will track most of these events for you electronically where you have enabled us to access feeds from your SMSF’s bank accounts. If we see any transactions that could meet the reporting criteria, we will be in touch with you to confirm the nature of these events.

Where electronic feeds are not available – if your bank does not support them or where you have opted not to enable the feeds, you will need to let us know about these events at the time they occur.

In addition to the new events based reporting regime, SMSFs are also obliged to report any of the following changes to the ATO within 28 days.

New laws hold franchisors responsible for vulnerable workers

Franchisors and holding companies could be held responsible if their franchisees or subsidiaries don’t follow workplace laws.

The Government has stepped in to protect workers following months of controversial headlines uncovering poor record keeping, questionable workplace practices and exploitation, underpayments, deception, and superannuation guarantee fraud by employers.

The Protecting Vulnerable Workers Bill amends the Fair Work Act to:

Increase penalties for ‘serious contraventions’ of workplace laws
A ‘serious contravention’ of workplace laws occur if someone knowingly contravenes the law and their conduct is part of a systematic pattern. The penalties for breaches vary according to the offence and have increased up to 10 times higher than cases without the aggravating features. A breach is more likely to be a ‘serious contravention’ if:

• there are concurrent contraventions of the Fair Work Act occurring at the same time (e.g., breaches of multiple award terms and record-keeping failures);
• the contraventions have occurred over a prolonged period of time (e.g., over multiple pay periods) or after complaints were first raised;
• multiple employees are affected (e.g., all or most employees doing the same kind of work at the workplace, or a group of vulnerable employees at the workplace); and
• accurate employee records have not been kept, and pay slips have not been issued, making alleged underpayments difficult to establish.

Prevent record keeping failures
Appropriate record keeping is a big part of the new laws to prevent poor employer practices being used as a defence; stymieing employee complaints for lack of evidence. Now, the onus of proof is on the employer to disprove an employee’s compliant.

The penalties for poor record keeping have also increased dramatically – now up to $12,600 for a standard breach and $126,000 for ‘serious contraventions’ by individuals and $630,000 for corporations. Maximum penalties are likely to apply where the employer knowingly falsified records and provided false or misleading payslips.

Hold franchisor entities and holding companies liable
New provisions hold franchisors and holding companies responsible for certain contraventions of the Fair Work Act by businesses in their networks.

The Government is concerned that some franchisors have either been blind to the problem of underpayments to workers or have not taken sufficient action to deal with it once it was brought to their attention.

The provisions only apply to responsible franchisors that have a significant degree of influence or control over the relevant franchisee’s affairs. Holding companies are assumed to have control. This means that franchisors and holding companies are held responsible “if they knew or could reasonably be expected to have known that the contraventions would occur, or that contraventions of the same or a similar character were likely to occur and they had significant influence or control over the companies in their network.”

Where franchisors (or their officers) recognise a problem and take action quickly to resolve it, it is unlikely that they will be held liable. This means that affected companies will need to have appropriate systems and monitoring in place to ensure that franchisee’s are acting within the law. This might include ensuring that franchise agreements or other business arrangements require franchisees to comply with workplace laws, establishing a hotline or contact point for employees, and auditing the businesses in the network.

Ban ‘cashback’ from employees or prospective employees
Workers in the 7-Eleven case reported that they were paid correctly but then required to hand cash back to the franchisee or lose their job. The Fair Work investigation found that this practice “was not isolated and was prevalent in a number of 7-Eleven stores.”

Asking an employee for ‘cashback’ so the person can keep their job, or to keep wages below minimum entitlements will always be unreasonable and prohibited. Penalties have increased tenfold for cases where these aggravated circumstances apply.

Powers and penalties of the Fair Work Ombudsman ramped up
During the 7-Eleven investigation, the Fair Work Ombudsman (FWO) expressed frustration at their limited investigative powers. The new laws provide the FWO with similar powers to the Australian Securities and Investment Commission and the Australian Competition and Consumer Commission. The new powers not only bolster information gathering but also provide the FWO with an enforceable power of questioning for the first time.

The FWO can now issue an ‘FWO notice’ requiring someone to give information, produce documents, or attend before the FWO to answer questions.

New penalties also apply for giving false or misleading information, or hindering or obstructing a Fair Work investigation.

The maximum penalty for failing to comply with an FWO notice is $126,000 for individuals and $630,000 for corporations.

The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

Should business push a social agenda?

For years we’ve been told that consumers prefer businesses that take a stand on social issues – those that are environmentally and socially friendly. But is that always the case?

Qantas CEO Alan Joyce had a pie shoved in his face at a business breakfast in May 2017 for Qantas’s proactive position on same sex marriage. The protagonist, a 67 year old former farmer claimed that Joyce is, “… very much part of a network trying to subvert the federal parliamentary process around the issue of marriage equality.”

The issue of corporate clout being used to promote social agendas was later attacked by the Minister for Education and Border Protection, Peter Dutton at a Liberal National Party State council meeting stating that, “It is unacceptable that people would use companies and the money of publicly listed companies to throw their weight around.” And, executives like Alan Joyce should “stick to their knitting.”

Then, there were the calls to boycott the airline from tennis legend Margaret Court and others in the community.

Qantas is not alone. Car maker Holden’s sponsorship of the 2017 Gay and Lesbian Mardi Gras (see Out Loud and Proud) and their pledge to support Australian Marriage Equality also came under attack from some consumers threatening to boycott the company.

Threatening to boycott a company is not new although generally it is in pursuit of change. When a business upsets a customer or a group of customers it’s the first thing that’s actioned; after all, consumers vote with their wallets. In 1955, during the American civil rights movement a boycott by blacks and whites almost crippled a bus company. The controversy was sparked after Rosa Parks refused to give up her seat for a white man. The bus service had to desegregate or face bankruptcy. Similar protests were held in stores to desegregate lunch counters. Martin Luther King Jr., knew the power of ‘economic withdrawal’ and used it effectively, calling to “redistribute the pain” to corporate America.

Qantas has not suffered for being at the epicentre of the gay marriage debate. In it’s most recent results the company achieved an underlying profit before tax of $1,401 million – the second highest in its history. The airline has clearly not alienated its customer base. The result however follows three years of pain and restructuring. Joyce attributes the airline’s performance to the diversity of the management team who led the transformation telling The Australian, “…as a gay Irishman running a national carrier it absolutely shows the meritocracy Australia is, and that diversity generated better strategy, better risk management, better debates [and] better outcomes.”

Mr Joyce was named a Companion of the Order of Australia (AC) in the Queen’s Birthday 2017 Honours List for his services to “the aviation transport industry, to the development of the national and international tourism sectors, to gender equity, inclusion and diversity, and to the community, particularly as a supporter of Indigenous education.”

For Holden, the diversity push is aligned to a shift in the type of worker it wants to attract. With the last manufacturing plant closing down this year, its workforce has dramatically changed from manufacturing to design, engineering, administration and sales. Holden’s Managing Director Mark Bernhard states that Holden is working to “to shake off the ‘blokey’ reputation our brand has been saddled with for years.” Diversity is a strategic goal. On its blog, Holden states that 27% of its corporate workforce is now women. The company is aiming to increase this target to 50% within 5 years.

“We know the commercial rationale of becoming more gender balanced, including over 80% of vehicle buying decisions being influenced by women,” Bernhard says. “But, we also have a social responsibility to help move our country forward by lending our voice and influence to issues that matter….I want Holden to be a leader; a leader in our industry, a leader in society, a leader who can change behaviours. If we don’t do it, who will?” Bernhard says.

In August, the German EDEKA retail outlet in Hamburg made a very physical point about racial diversity by stripping the supermarket’s shelves of all goods not produced or sourced in Germany. The result; the shelves were almost bare. Instead, staff made signs saying (translated) “This is how empty a shelf is without foreigners”. The independent supermarket’s bold anti-xenophobia campaign went viral. The company actively promotes a culture of diversity and the campaign has not only reinforced that brand value but attracted positive global feedback. But, the initiative was not without its detractors as the campaign is a month out from Germany’s federal elections.

But what about influence through association? In April, the Catholic Archbishop of Hobart wrote an article for The Australian newspaper commenting that there “is an increasingly insidious presence operating in our corporate sector. This presence is the existence of so-called “diversity” organisations and committees. Far from promoting authentic diversity within our businesses, they have become the means to impose a particular social agenda.” The Archbishop cites scenarios where senior employees were forced to remove themselves from involvement with groups publicly in conflict with their employer’s support of the LGBTI community. While we’re not sure what “authentic diversity” is as opposed to plain vanilla diversity, it’s an interesting debate. What happens if an employee’s public representation and support for an organisation is in conflict with their employer’s public position?

The fundamental rule for any business seeking to embrace a social position is to understand your market. If your business’s social agenda is likely to alienate your market rather than encourage or diversify it, then think twice. If an initiative does not enhance the business’s reputation with its customers, or enhance its culture with existing and potential staff, then why bother? Every initiative needs to have a measureable purpose and be aligned to your business’s strategic direction.

In their book Leveraging Corporate Responsibility: The Stakeholder Route to Maximizing Business and Social Value, authors Bhattacharya, Korschun and Sen experiment with what drives value in corporate responsibility. They found that “well-meaning corporate-responsibility activities can actually harm a company’s competitiveness.” This is primarily the case for businesses perceived as having low product quality. Consumers took the view that these businesses should just focus on their product not other activities. But, for businesses perceived to have high product quality, the corporate initiatives enhanced public perception and the likelihood to buy. The key take outs were:

• Don’t hide market motives – people understand that there needs to be a business case.
• Serve stakeholders’ true needs – set clear objectives and achievable targets, and work together with key stakeholder groups.
• Test your progress – assess initiatives regularly to ensure they foster the desired unity between the business’ and stakeholder goals.

In every period of social change there is vitriolic debate. Before entering the fracas think about what footprint you are creating for your business and what this might mean if you are on the wrong side of history. Unlike in 1902 when the suffragette movement in Australia won the right for women to vote and stand in Federal elections, what is said and done is not merely recorded on paper – it’s freely available and accessible on the internet for a long time.

ASIC Targets Growing Companies In Audit Crackdown

ASIC is in the midst of a concerted campaign targeting private companies that have outgrown the reporting exemptions.

ASIC requires companies to prepare and lodge a financial report and a directors’ report each financial year, and have the accounts audited unless the company is exempt. Most small companies are exempt from the compliance requirements as are small foreign owned companies in certain circumstances.

Utilising data from the Australian Taxation Office (ATO), ASIC is contacting companies that have moved beyond or not complied with the exemption and are now in breach of their reporting requirements.

If your company has never had to lodge financial reports with ASIC in the past, it’s very easy to breach the rules without realising it. The reporting requirements are hard and fast and ASIC is not overly sympathetic to “oops” as a reason for a breach.

What is a small company?

Small companies are exempt if they satisfy at least two of the following:
• The consolidated gross revenue for the financial year for the company and any entities the company controls is less than $25 million
• The value of consolidated gross assets at the end of the financial year of the company and any entities it controls is less than $12.5 million, and
• The company and any entities it controls have fewer than 50 employees (full time equivalent) at the end of the financial year.

No longer a small company? Then you are a large company and are required to lodge audited financial statements.

Will the auditor want to audit the previous year’s figures when we were still a small company? Yes.

This exemption is for companies not controlled by a foreign entity or disclosing entities.

Failure to lodge annual accounts with ASIC may result in penalties and potentially the company being deregistered.

The rules for foreign controlled companies

Small companies controlled by a foreign company may also be exempt in some circumstances.

For small companies that are not part of a large consolidated group, the directors must resolve to rely on relief provided by ASIC and lodge this resolution (form 384). Timing is everything to be eligible for this exemption, if the right form is not lodged between the period starting 3 months prior to the start of the financial year relief is first applied and ending 4 months after the end of the relevant financial year, the exemption is unlikely to apply.

ASIC warns that, “in most cases, relief is not granted for financial reports that were due in the past”.

Foreign companies that fail to lodge the appropriate financials and are not exempt may be deregistered.

Again, if you have a requirement to lodge financial statements with ASIC, they must be audited.

If you are uncertain about the requirements for your company, please contact us and we’ll work with you to ensure your company is compliant.

Super Guarantee – What Happens When You Get It Wrong

The ATO receives around 20,000 reports each year from people who believe their employer has either not paid or underpaid compulsory superannuation guarantee (SG). In 2015-16 the ATO investigated 21,000 cases raising $670 million in SG and penalties.

The ATO’s own risk assessments suggest that between 11% and 20% of employers could be non-compliant with their SG obligations and that non-compliance is “endemic, especially in small businesses and industries where a large number of cash transactions and contracting arrangements occur.”

Celebrity chefs are the latest in a line of employers to publicly fall foul of the rules – one for allegedly inventing details on employee payslips and another for miscalculating wages. But what happens if your business gets SG compliance wrong?

Under the superannuation guarantee legislation, every Australian employer has an obligation to pay 9.5% Superannuation Guarantee Levy for their employees unless the employee falls within a specific exemption. SG is calculated on Ordinary Times Earnings – which is salary and wages including things like commissions, shift loadings and allowances, but not overtime payments.

Employers that fail to make their superannuation guarantee payments on time need to pay the SG charge (SGC) and lodge a Superannuation Guarantee Statement. The SGC applies even if you pay the outstanding SG soon after the deadline.

The SGC is particularly painful for employers because it is comprised of:
• The employee’s superannuation guarantee shortfall amount – so, all of the superannuation guarantee owing
• Interest of 10% per annum, and
• An administration fee of $20 for each employee with a shortfall per quarter.

Unlike normal superannuation guarantee contributions, SGC amounts are not deductible, even if you pay the outstanding amount. That is, if you pay SG late, you can no longer deduct the SG amount even if you bring the payment up to date.

And, the calculation for SGC is different to how you calculate SG. The SGC is calculated using the employee’s salary or wages rather than their ordinary time earnings. An employee’s salary and wages may be higher than their ordinary time earnings particularly if you have workers who are paid for overtime.

Under the quarterly superannuation guarantee, the interest component will be calculated on an employer’s quarterly shortfall amount from the first day of the relevant quarter to the date when the superannuation guarantee charge would be payable.

The penalties imposed on the employer for failing to meet SG obligations on time might seem harsh, but they have been designed that way on purpose. This is really money that belongs to the employee and should be sitting in their superannuation fund earning further income to support the employee in their retirement.

To recover superannuation guarantee from the employer, the directors of a company automatically become personally liable for a penalty equal to the unpaid amount.

Directors who receive penalty notices need to take action to deal with this – speaking with a legal adviser or accountant is a wqgood starting point.

If you are uncertain about your SG obligations or would like a compliance audit of this and other key risk areas of your business, give us a call.

Director’s fees: What and How To Pay Them

The issue of Director’s fees often comes up – should we pay directors, how to pay, and if we do pay fees how should they be paid? We answer the common questions for private companies.

Can you pay a Director?

Directors who work in the company, executive directors, would generally have an agreed executive remuneration structure that takes into account their service including attending Board meetings (so, generally no extra fees for service outside of the agreed remuneration structure).

For non-executive directors, companies can only pay Director’s fees if the company constitution allows for it or a resolution is passed to make the payments. The resolution to pay directors fees must be made and documented prior to the fees being paid.

These fees are in addition to any agreed expenses such as travel expenses to attend board meetings or in connection with the company’s business.

Tax deductibility of director’s fees

Fees paid to Board members are tax deductible to the company in the year they are paid or intended to be paid. Many Boards pass a resolution to pay Director’s fees just prior to the end of the financial year to claim the tax deduction in that same year. The fees do not necessarily have to be paid prior to the end of the financial year but the Board must have definitely committed to paying them and then the fees paid as soon as practicable.

Tax on director’s fees

Assuming the directors fees are being paid through an individual contractual arrangement (i.e. the contract is with Mr Smith to act as a director, not with Smith Pty Ltd to provide ‘someone’ as a director, and that happens to be Mr Smith), then the directors fees are treated like salary and wages for the purposes of PAYG withholding. PAYG is required to be withheld from the gross directors fees, reported on the IAS or BAS that is used to report the salary and wages and related PAYG W for that period, and should be remitted to the ATO.

Director’s fees fall within the definition of Ordinary Times Earnings, and superannuation guarantee applies.

Director fees are required to be reported on a payment summary, and are generally reported at item 2 of an individual’s tax return. If they are not reported on payment summaries, it could result in errors in the PAYG withholding annual report, and queries from the ATO regarding the payments.

While the ATO may recognise that there can be a difference in the provision of services by and payments to directors (e.g. the contract may be for ongoing director services and attendance at quarterly board meetings, with payments of director fees to be made once a quarter, not monthly), the PAYG W and superannuation contributions are still subject to reporting and payment by the standard deadlines that apply for all other employees.

The directors fee should also be included in any workers compensation calculation and would generally be captured for payroll tax purposes as well.

Can Director’s fees be paid as super contributions?

Yes, assuming the proper process has been followed (e.g., effective salary sacrifice arrangement has been entered into before the fees have been earned), fees can be paid to the Director’s superannuation fund as a reportable employer contribution to utilise preferential tax rates. This assumes the director is within their contribution limits.

The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

Does superannuation offer an avenue to help downsizers and first home savers? The Government seems to think so. Late last month the detail of the housing initiatives announced in the Federal Budget were released for consultation. We explore what’s on offer and the implications.

Super concessions for downsizers
If you are over 65, have held your home for 10 years or more and are looking to sell, from 1 July 2018 you might be able to contribute some of the proceeds of the sale of your home to superannuation

The benefit of this measure is that you can contribute a lump sum of up to $300,000 per person to superannuation without being restricted by the existing non-concessional contribution caps – $100,000 subject to your total superannuation balance – or age restrictions. It’s a way of building your superannuation quickly and taking advantage of superannuation’s concessional tax rates. The $1.6 million transfer balance cap will continue to apply so your pension interests cannot exceed this amount. And, the Age Pension means test will continue to apply. If you are considering using this initiative, it will be important to get advice to ensure that you are eligible to use this measure and the contribution does not adversely affect your overall financial position.

The downsizer initiative applies to the sale of any dwelling in Australia – other than a caravan, houseboat or mobile home – that you or your spouse have held continuously for at least 10 years. Over those 10 years, the dwelling had to have been your main residence for at least part of the time. As long as you qualify for at least a partial main residence exemption (or you would qualify for the exemption if a capital gain arose) you may be able to access the downsizer concession. This means that you do not actually need to have lived in the property for the 10 year period being tested.

The rules also take into account changes of ownership between two spouses over the 10 year period prior to the sale. This could assist in situations where a spouse who owned the property has died and their interest is inherited by their surviving spouse. The surviving spouse can count the ownership period of their deceased spouse in determining whether the 10 year ownership period test is satisfied. This rule could also assist in situations where assets have been transferred as a result of marriage or de facto relationship breakdown.

In general, the maximum downsizer contribution is $300,000 per contributor (so, $600,000 for a couple) but must only come from the proceeds of the sale. The contribution/s need to be made within 90 days after your home changes ownership (generally, the date of settlement) but you can apply to the Tax Commissioner to extend this period. And, the initiative only applies once – you cannot use it again for future properties.

Using super to save for your first home
Saving for a first home is hard. From 1 July 2018, the first home savers scheme will enable first-home buyers to save for a deposit inside their superannuation account, attracting the tax incentives and some of the earnings benefits of superannuation.

Home savers can make voluntary concessional contributions (for example by salary sacrificing) or non-concessional contributions (voluntary after tax contributions) of $15,000 a year within existing caps, up to a total of $30,000.

When you are ready to buy a house, you can withdraw those contributions along with any deemed earnings in order to help fund a deposit on your first home. To extract the money from super, home savers apply to the Commissioner of Taxation for a first home super saver determination. The Commissioner then determines the maximum amount that can be released from the super fund. When the amount is released from super, it is taxed at your marginal tax rate less a 30% offset.

For example, if you earn $70,000 a year and make salary sacrifice contributions of $10,000 per year, after 3 years of saving, approximately $25,892 will be available for a deposit under the First Home Super Saver Scheme – $6,210 more than if the saving had occurred in a standard deposit account (you can estimate the impact of the scheme on you using the estimator).

If you don’t end up entering into a contract to purchase or construct a home within 12 months of withdrawing the deposit from superannuation, you can recontribute the amount to super, or pay an additional tax to unwind the concessional tax treatment that applied on the release of the money.

To access the scheme, home savers must be 18 years of age or older, and cannot ever have held taxable Australian real property (this includes residential, investment, and commercial property assets). Home savers also need to move into the property as soon as practicable and occupy it for at least 6 of the first 12 months that it is practicable to do so.

As with the concession for downsizers, the first home saver scheme can only be used once by you.

While the capacity to voluntarily contribute to the first home savers scheme started on 1 July 2017 (with withdrawals available form 1 July 2018), it’s best to wait until the legislation is confirmed by Parliament just in case anything changes.

Main residence exemption removed for non-residents
The Federal Budget announced that non-residents will no longer be able to access the main residence exemption for Capital Gains Tax (CGT) purposes from 9 May 2017 (Budget night). Now that the draft legislation has been released, more details are available about how this exclusion will work.

Under the new rules, the main residence exemption – the exemption that prevents your home being subject to CGT when you dispose of it – will not be available to non-residents. The draft legislation is very ‘black and white.’ If you are not an Australian resident for tax purposes at the time you dispose of the property, CGT will apply to any gain you made – this is in addition to the 12.5% withholding tax that applies to taxable Australian property with a value of $750,000 or more (from 1 July 2017).

Transitional rules apply for non-residents affected by the changes if they owned the property on or before 9 May 2017, and dispose of the property by 30 June 2019. This gives non-residents time to sell their main residence (or former main residence) and obtain tax relief under the main residence rules if they choose.

Interestingly, the draft rules apply even if you were a resident for part of the time you owned the property. The measure applies if you are a non-resident when you dispose of the property regardless of your previous residency status.

Special amendments are also being introduced to apply the new rules consistently to deceased estates and special disability trusts to ensure that property held by non-residents is excluded from the main residence exemption.

The rules have also been tightened for property held through companies or trusts to prevent complex structuring to get around the rules. The draft amends the application of CGT to non-residents when selling shares in a company or interests in a trust. The rules ensure that multiple layers of companies or trusts cannot be used to circumvent the 10% threshold that applies in order to determine whether membership interests in companies or trusts are classified as taxable Australian property.

The residency tests to determine who is a resident for tax purposes can be complex and are often subjective. Please contact us if you would like to better understand your position and the tax implications of your residency status. Simply living in Australia does not make you a resident for tax purposes, particularly if you continue to have interests overseas.

What everyone selling a property valued at $750k or more needs to know

Every vendor selling a property needs to prove that they are a resident of Australia for tax purposes unless they are happy for the purchaser to withhold a 12.5% withholding tax. From 1 July 2017, every individual selling a property with a sale value of $750,000 or more is affected.

To prove you are a resident, you can apply online to the Tax Commissioner for a clearance certificate, which will remain valid for 12 months.

While these rules have been in place since 1 July 2016, on 1 July 2017 the threshold for properties reduced from $2 million to $750,000 and the withholding tax level increased from 10% to 12.5%.

The intent of the foreign resident CGT withholding rules is to ensure that tax is collected on the sale of taxable Australian property by foreign residents. But, the mechanism for collecting the tax affects everyone regardless of their residency status.

Properties under $750,000 are excluded from the rules. This exclusion can apply to residential dwellings, commercial premises, vacant land, strata title units, easements and leasehold interests as long as they have a market value of less than $750,000. If the parties are dealing at arm’s length, the actual purchase price is assumed to be the market value unless the purchase price is artificially contrived.

If required, the Tax Commissioner has the power to vary the amount that is payable under these rules, including varying the amounts to nil. Either a vendor or purchaser may apply to the Commissioner to vary the amount to be paid to the ATO. This might be appropriate in cases where:

• The foreign resident will not make a capital gain as a result of the transaction (e.g., they will make a capital loss on the sale of the asset);
• The foreign resident will not have a tax liability for that income year (e.g., where they have carried forward capital losses or tax losses etc.,); or
• Where they are multiple vendors, but they are not all foreign residents.

If the Commissioner agrees to vary the amount, it is only effective if it is provided to the purchaser.

The withholding rules are only intended to apply when one or more of the vendors is a non-resident. However, the rules are more complicated than this and the way they apply depends on whether the asset being purchased is taxable Australian real property or a company title interest relating to real property in Australia.

Please contact us if you need assistance navigating the foreign resident CGT withholding rules or are uncertain about how the rules are likely to apply to a transaction.

The Tax Commissioner’s hit list

Every so often the Australian Taxation Office (ATO) sends a ‘shot across the bow’ warning taxpayers where their gaze is focussed. Last month in a speech to the National Press Club, Tax Commissioner Chris Jordan did exactly that. Part of the reason for this public outing is the gap between the amount of tax the ATO collects and the amount they think should be collected – a gap of well over 6% according to the Commissioner.

“The risks of non-compliance highlighted by our gap research so far in this market are mainly around deductions, particularly work related expenses. The results of our random audits and risk-based audits are showing many errors and over-claiming for work related expenses – from legitimate mistakes and carelessness through to recklessness and fraud. In 2014-15, more than $22 billion was claimed for work-related expenses. While each of the individual amounts over-claimed is relatively small, the sum and overall revenue impact for the population involved could be significant,” the Commissioner stated.

Individuals – the hit list
• Claims for work-related expenses that are unusually high relative to others across comparable industries and occupations;
• Excessive rental property expenses;
• Non-commercial rental income received for holiday homes;
• Interest deductions claimed for the private proportion of loans; and
• People who have registered for GST but are not actively carrying on a business.
W,Q

While small in value, the ATO are also concerned about the amount of people who appear to be claiming deductions by default for items such as clothing expenses. In 2014–15, around 6.3 million people made a claim for $150 for work related clothing – the level you can claim without having to fully substantiate your expenses. Those 6.3 million claims amounted to $1.8 billion in deductions.

Small business – the hit list
• Those deliberately hiding income or avoiding their obligations by failing to register, keep records and/or lodge accurately;
• Businesses that report outside of the small business benchmarks for their industry;
• Employers not deducting and/or not sending PAYG withholding amounts from employee wages;
• Employers not meeting their superannuation guarantee obligations;
• Businesses registered for GST but not actively carrying on a business;
• Failure to lodge activity statements; and
• Incorrect and under reporting of sales.

If your business is outside of the ATO’s benchmarks, it’s important to be prepared to defend why this is the case. This does not mean that your business is doing anything wrong, but it increases the possibility that the ATO will look more closely at your business and seek an explanation.

Private groups – the hit list
• Tax or economic performance not comparable to similar businesses;
• A lack of transparency in tax affairs;
• Large, one-off or unusual transactions, including transfer or shifting of wealth;
• A history of aggressive tax planning;
• Choosing not to comply or regularly taking controversial interpretations of the law;
• Lifestyle not supported by after-tax income;
• Treating private assets as business assets; and
• Poor governance and risk-management systems.

Property developers – the hit list
• Developers using their SMSF to undertake or fund the development and subdivision of properties leading to sale;
• Where there has been sale or disposal of property shortly after the completion of a subdivision and the amount is returned as a capital gain;
• Where there is a history in the wider economic group of property development or renovation sales, yet a current sale is returned as a capital gain;
• How profit is recognised where related entities undertake a development (i.e., on the development fees as well as sales of the completed development);
• Whether inflated deductions are being claimed for property developments;
• Multi-purpose developments – where units are retained for rent in a multi-unit apartment, to ensure that the costs are appropriately applied to the properties produced.

These are just a small sample of the ATO’s area of focus. Other areas include tax and travel related expenses and self-education expenses. We’ll guide you through the risk areas pertinent to your individual situation but if you are concerned about any of the ‘hit list’ areas mentioned, please contact us.

Quote of the month
“The Entrepreneur always searches for change, responds to it, and exploits it as an opportunity.”
Peter Drucker

The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained

Does superannuation offer an avenue to help downsizers and first home savers? The Government seems to think so. Late last month the detail of the housing initiatives announced in the Federal Budget were released for consultation. We explore what’s on offer and the implications.

Super concessions for downsizers
If you are over 65, have held your home for 10 years or more and are looking to sell, from 1 July 2018 you might be able to contribute some of the proceeds of the sale of your home to superannuation

The benefit of this measure is that you can contribute a lump sum of up to $300,000 per person to superannuation without being restricted by the existing non-concessional contribution caps – $100,000 subject to your total superannuation balance – or age restrictions. It’s a way of building your superannuation quickly and taking advantage of superannuation’s concessional tax rates. The $1.6 million transfer balance cap will continue to apply so your pension interests cannot exceed this amount. And, the Age Pension means test will continue to apply. If you are considering using this initiative, it will be important to get advice to ensure that you are eligible to use this measure and the contribution does not adversely affect your overall financial position.

The downsizer initiative applies to the sale of any dwelling in Australia – other than a caravan, houseboat or mobile home – that you or your spouse have held continuously for at least 10 years. Over those 10 years, the dwelling had to have been your main residence for at least part of the time. As long as you qualify for at least a partial main residence exemption (or you would qualify for the exemption if a capital gain arose) you may be able to access the downsizer concession. This means that you do not actually need to have lived in the property for the 10 year period being tested.

The rules also take into account changes of ownership between two spouses over the 10 year period prior to the sale. This could assist in situations where a spouse who owned the property has died and their interest is inherited by their surviving spouse. The surviving spouse can count the ownership period of their deceased spouse in determining whether the 10 year ownership period test is satisfied. This rule could also assist in situations where assets have been transferred as a result of marriage or de facto relationship breakdown.

In general, the maximum downsizer contribution is $300,000 per contributor (so, $600,000 for a couple) but must only come from the proceeds of the sale. The contribution/s need to be made within 90 days after your home changes ownership (generally, the date of settlement) but you can apply to the Tax Commissioner to extend this period. And, the initiative only applies once – you cannot use it again for future properties.

Using super to save for your first home
Saving for a first home is hard. From 1 July 2018, the first home savers scheme will enable first-home buyers to save for a deposit inside their superannuation account, attracting the tax incentives and some of the earnings benefits of superannuation.

Home savers can make voluntary concessional contributions (for example by salary sacrificing) or non-concessional contributions (voluntary after tax contributions) of $15,000 a year within existing caps, up to a total of $30,000.

When you are ready to buy a house, you can withdraw those contributions along with any deemed earnings in order to help fund a deposit on your first home. To extract the money from super, home savers apply to the Commissioner of Taxation for a first home super saver determination. The Commissioner then determines the maximum amount that can be released from the super fund. When the amount is released from super, it is taxed at your marginal tax rate less a 30% offset.

For example, if you earn $70,000 a year and make salary sacrifice contributions of $10,000 per year, after 3 years of saving, approximately $25,892 will be available for a deposit under the First Home Super Saver Scheme – $6,210 more than if the saving had occurred in a standard deposit account (you can estimate the impact of the scheme on you using the estimator).

If you don’t end up entering into a contract to purchase or construct a home within 12 months of withdrawing the deposit from superannuation, you can recontribute the amount to super, or pay an additional tax to unwind the concessional tax treatment that applied on the release of the money.

To access the scheme, home savers must be 18 years of age or older, and cannot ever have held taxable Australian real property (this includes residential, investment, and commercial property assets). Home savers also need to move into the property as soon as practicable and occupy it for at least 6 of the first 12 months that it is practicable to do so.

As with the concession for downsizers, the first home saver scheme can only be used once by you.

While the capacity to voluntarily contribute to the first home savers scheme started on 1 July 2017 (with withdrawals available form 1 July 2018), it’s best to wait until the legislation is confirmed by Parliament just in case anything changes.

Main residence exemption removed for non-residents
The Federal Budget announced that non-residents will no longer be able to access the main residence exemption for Capital Gains Tax (CGT) purposes from 9 May 2017 (Budget night). Now that the draft legislation has been released, more details are available about how this exclusion will work.

Under the new rules, the main residence exemption – the exemption that prevents your home being subject to CGT when you dispose of it – will not be available to non-residents. The draft legislation is very ‘black and white.’ If you are not an Australian resident for tax purposes at the time you dispose of the property, CGT will apply to any gain you made – this is in addition to the 12.5% withholding tax that applies to taxable Australian property with a value of $750,000 or more (from 1 July 2017).

Transitional rules apply for non-residents affected by the changes if they owned the property on or before 9 May 2017, and dispose of the property by 30 June 2019. This gives non-residents time to sell their main residence (or former main residence) and obtain tax relief under the main residence rules if they choose.

Interestingly, the draft rules apply even if you were a resident for part of the time you owned the property. The measure applies if you are a non-resident when you dispose of the property regardless of your previous residency status.

Special amendments are also being introduced to apply the new rules consistently to deceased estates and special disability trusts to ensure that property held by non-residents is excluded from the main residence exemption.

The rules have also been tightened for property held through companies or trusts to prevent complex structuring to get around the rules. The draft amends the application of CGT to non-residents when selling shares in a company or interests in a trust. The rules ensure that multiple layers of companies or trusts cannot be used to circumvent the 10% threshold that applies in order to determine whether membership interests in companies or trusts are classified as taxable Australian property.

The residency tests to determine who is a resident for tax purposes can be complex and are often subjective. Please contact us if you would like to better understand your position and the tax implications of your residency status. Simply living in Australia does not make you a resident for tax purposes, particularly if you continue to have interests overseas.

What everyone selling a property valued at $750k or more needs to know

Every vendor selling a property needs to prove that they are a resident of Australia for tax purposes unless they are happy for the purchaser to withhold a 12.5% withholding tax. From 1 July 2017, every individual selling a property with a sale value of $750,000 or more is affected.

To prove you are a resident, you can apply online to the Tax Commissioner for a clearance certificate, which will remain valid for 12 months.

While these rules have been in place since 1 July 2016, on 1 July 2017 the threshold for properties reduced from $2 million to $750,000 and the withholding tax level increased from 10% to 12.5%.

The intent of the foreign resident CGT withholding rules is to ensure that tax is collected on the sale of taxable Australian property by foreign residents. But, the mechanism for collecting the tax affects everyone regardless of their residency status.

Properties under $750,000 are excluded from the rules. This exclusion can apply to residential dwellings, commercial premises, vacant land, strata title units, easements and leasehold interests as long as they have a market value of less than $750,000. If the parties are dealing at arm’s length, the actual purchase price is assumed to be the market value unless the purchase price is artificially contrived.

If required, the Tax Commissioner has the power to vary the amount that is payable under these rules, including varying the amounts to nil. Either a vendor or purchaser may apply to the Commissioner to vary the amount to be paid to the ATO. This might be appropriate in cases where:

• The foreign resident will not make a capital gain as a result of the transaction (e.g., they will make a capital loss on the sale of the asset);
• The foreign resident will not have a tax liability for that income year (e.g., where they have carried forward capital losses or tax losses etc.,); or
• Where they are multiple vendors, but they are not all foreign residents.

If the Commissioner agrees to vary the amount, it is only effective if it is provided to the purchaser.

The withholding rules are only intended to apply when one or more of the vendors is a non-resident. However, the rules are more complicated than this and the way they apply depends on whether the asset being purchased is taxable Australian real property or a company title interest relating to real property in Australia.

Please contact us if you need assistance navigating the foreign resident CGT withholding rules or are uncertain about how the rules are likely to apply to a transaction.

The Tax Commissioner’s hit list

Every so often the Australian Taxation Office (ATO) sends a ‘shot across the bow’ warning taxpayers where their gaze is focussed. Last month in a speech to the National Press Club, Tax Commissioner Chris Jordan did exactly that. Part of the reason for this public outing is the gap between the amount of tax the ATO collects and the amount they think should be collected – a gap of well over 6% according to the Commissioner.

“The risks of non-compliance highlighted by our gap research so far in this market are mainly around deductions, particularly work related expenses. The results of our random audits and risk-based audits are showing many errors and over-claiming for work related expenses – from legitimate mistakes and carelessness through to recklessness and fraud. In 2014-15, more than $22 billion was claimed for work-related expenses. While each of the individual amounts over-claimed is relatively small, the sum and overall revenue impact for the population involved could be significant,” the Commissioner stated.

Individuals – the hit list
• Claims for work-related expenses that are unusually high relative to others across comparable industries and occupations;
• Excessive rental property expenses;
• Non-commercial rental income received for holiday homes;
• Interest deductions claimed for the private proportion of loans; and
• People who have registered for GST but are not actively carrying on a business.
W,Q

While small in value, the ATO are also concerned about the amount of people who appear to be claiming deductions by default for items such as clothing expenses. In 2014–15, around 6.3 million people made a claim for $150 for work related clothing – the level you can claim without having to fully substantiate your expenses. Those 6.3 million claims amounted to $1.8 billion in deductions.

Small business – the hit list
• Those deliberately hiding income or avoiding their obligations by failing to register, keep records and/or lodge accurately;
• Businesses that report outside of the small business benchmarks for their industry;
• Employers not deducting and/or not sending PAYG withholding amounts from employee wages;
• Employers not meeting their superannuation guarantee obligations;
• Businesses registered for GST but not actively carrying on a business;
• Failure to lodge activity statements; and
• Incorrect and under reporting of sales.

If your business is outside of the ATO’s benchmarks, it’s important to be prepared to defend why this is the case. This does not mean that your business is doing anything wrong, but it increases the possibility that the ATO will look more closely at your business and seek an explanation.

Private groups – the hit list
• Tax or economic performance not comparable to similar businesses;
• A lack of transparency in tax affairs;
• Large, one-off or unusual transactions, including transfer or shifting of wealth;
• A history of aggressive tax planning;
• Choosing not to comply or regularly taking controversial interpretations of the law;
• Lifestyle not supported by after-tax income;
• Treating private assets as business assets; and
• Poor governance and risk-management systems.

Property developers – the hit list
• Developers using their SMSF to undertake or fund the development and subdivision of properties leading to sale;
• Where there has been sale or disposal of property shortly after the completion of a subdivision and the amount is returned as a capital gain;
• Where there is a history in the wider economic group of property development or renovation sales, yet a current sale is returned as a capital gain;
• How profit is recognised where related entities undertake a development (i.e., on the development fees as well as sales of the completed development);
• Whether inflated deductions are being claimed for property developments;
• Multi-purpose developments – where units are retained for rent in a multi-unit apartment, to ensure that the costs are appropriately applied to the properties produced.

These are just a small sample of the ATO’s area of focus. Other areas include tax and travel related expenses and self-education expenses. We’ll guide you through the risk areas pertinent to your individual situation but if you are concerned about any of the ‘hit list’ areas mentioned, please contact us.

Quote of the month
“The Entrepreneur always searches for change, responds to it, and exploits it as an opportunity.”
Peter Drucker

The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained

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About Kingston Knight

Kingston & Knight Accountants is a Melbourne-based accounting/tax advisory firm with over 40 years collective experience working with individual clients, small, and medium sized businesses. We are passionate about bringing the best outcomes for out clients.